Demand for behavioral health services has skyrocketed in recent years, driving the need for providers and health systems to expand their geographic footprints. In the process, some are finding great success with joint venture partnerships.
JV deals have become a key method to meet the rising need for behavioral health services, and hospital systems are now actively pursuing JV deals as a method of growth. The extensive process of building a JV requires patience and persistence, industry insiders said at the Behavioral Health Business 2024 INVEST conference.
Health care companies like Acadia Healthcare (Nasdaq: ACHC) and US HealthVest have made JVs a crucial part of their portfolios.
Acadia alone has fostered 20 JV partnerships to expand its footprint and acute inpatient behavioral health services.
“We build wholly owned de novo hospitals,” Isa Diaz, senior vice president of strategic affairs for Acadia, said at INVEST. “But we also thought the JV strategy was critical as we were trying to expand our footprint, especially in markets that are not easy to penetrate.”
Acadia is the largest standalone behavioral health care company in the U.S. It operates 253 behavioral health care facilities with approximately 11,100 beds in 39 states and Puerto Rico.
US HealthVest also takes a two-pronged approach to growth, having grown 12 hospitals through de novo strategies and currently operating four hospitals built through JVs.
“One of the situations that we encounter frequently is that particularly with many not-for-profit, community-based hospitals, they have a mission to provide a broad range of services to their communities, and they know how to do most of them, but they struggle with behavioral,” Dr. Richard Kresch, CEO and founder of US HealthVest, said at INVEST. “I think it’s becoming more and more a part of the general business strategy of not-for-profits to look for outside assistance.”
New York City-based US HealthVest owns, operates and develops freestanding psychiatric hospitals. It currently operates about 1,300 beds with approximately 100 currently under construction in multiple states.
Both US HealthVest and Acadia say the courtship process of a JV, during which both parties work to ensure their values are aligned, is crucial. Some health systems will hire an investment banking group to help with the process.
“They want to kick the tires, visit one of your hospitals, check references,” Diaz said. “They’ve got to get comfortable. And that’s just to get to the table.”
Acadia considers a health system’s reputation when creating partnerships, as well as its values.
“For Acadia, it’s been a tremendous benefit for certain markets to have a partner that is a known entity in that local community,” Diaz said. “There’s almost like a brand halo effect. You’re benefiting from their established relationship with not only regulatory folks in the state, especially if there’s a CON (certificate of need) requirement, but having that partner really gives us a head start and helps us ramp up the hospital with a known entity that’s trusted in that local community.”
Acadia leverages a third-party valuation firm to determine what each party is contributing to the JV, which helps increase comfort with the deal.
One of the key initial steps for a JV is to settle on location.
“Many of our partners have land that they can contribute to the joint venture, and that’s one of the things that they’re bringing to the table,” Diaz said. “Sometimes they don’t, and looking for the right location to build a new hospital is really important.”
Once both parties are at the table, JVs require an in-depth, extended gestation period before construction begins.
“The pace at which the process proceeds is often very slow,” Kresch said. “A project that we may be starting discussions about tomorrow may not see the light of day and building coming out of the ground for a couple of years.”
Discussions need to set expectations. Some elements tend to be consistent across most JVs, such as the for-profit developer usually being the majority owner. Other elements, like determining who will hire physicians, are decided on a case-by-case basis.
Factors like the state where the hospital will be built can swell the timeline even further.
CON states prolong the drawing board process, but US HealthVest has seen these states as worthwhile investments of time and resources. The company primarily focuses its JV attention on CON states.
Legal processes can be lengthy, like in the cases of academic medical centers, which may have up to six boards, all of which must sign off on the project.
Even after all discussions are completed, and expectations set, more work is in store. Paperwork takes about a year to finalize, barring any significant disagreements.
“That can be a laborious and slow-moving process,” Kresch said. “The easy part is running in the hospital.”
The process of aligning values and setting expectations, though intensive, means that few JV deals fizzle out. Neither Acadia nor US HealthVest has experienced an unsuccessful JV.
One recent Acadia JV with Bronson Healthcare in Battle Creek, Michigan, took three and a half years but resulted in a 96-bed hospital that will greatly benefit patients and families, according to Diaz.
“To see that full cycle is wonderful to experience,” Diaz said. “To know that there are going to be a lot of patients and families that are going to benefit from that hard work makes it all worthwhile.”
Companies featured in this article:
