Inside The Competitive But Fragmented World of IDD Dealmaking

The intellectual and developmental disability (IDD) field may be one of the most complex and fragmented segments of the behavioral health industry.

That has not prevented IDD providers, however, from driving an impressive number of deals. That includes both for-profit and nonprofit organizations.

“Having run and operated within all verticals of behavioral health, IDD is the most complex from an investor standpoint, but also in many ways from an operator standpoint,” Stacy DiStefano, CEO of Consulting for Human Services, told Behavioral Health Business during a panel talk at INVEST 2023. “It’s the most fragmented of all the providers.”


Even determining the number of IDD providers in the country is a challenge. DiStefano estimates that there are tens of thousands of various organizations, but says there’s no way to determine an exact number.

“About 20% of them in the space are associated with a state or a national association,” she said. “The others you’d have to go county by county, state by state, and look up EIN numbers to just figure out who they are.”

Stacy DiStefano, CEO of Consulting for Human Services, speaks at the 2023 INVEST conference.
Stacy DiStefano, CEO of Consulting for Human Services, speaks at the 2023 INVEST conference.

IDD providers have historically been faith-based organizations or nonprofits, but are becoming increasingly competitive as businesses and are beginning to consolidate, mirroring trends across health care.


As they’ve sought to scale and become more sophisticated, some have turned to capital partners for support.

“IDD, in our minds, is one [part of behavioral health that is] on a county by county or local geography by local geography basis,” Matthew Pettit, founding partner of Seven Hills Capital, said at INVEST. “You really have to be willing to roll up your sleeves. And whether it’s mitigating the DSP (direct support professionals) crisis or mitigating local rate pressures, I think from the investor perspective, you have to be willing to go a level deeper recently vis-à-vis other parts of behavioral health.”

Nashville, Tennessee-based Seven Hills Capital is a private equity firm that focuses exclusively on health care. Its IDD portfolio companies include VersiCare, which it formed in 2018 in partnership with ExpertCare’s senior management team.

Matthew Pettit, founding partner of Seven Hills Capital, speaks at the 2023 INVEST conference.

Other examples of PE-backed IDD providers include The Vistria Group-backed Sevita and Webster Equity Partners-backed Redwood Family Care Network.

Reimbursement is one area of IDD care that varies widely from state to state. While rates are slightly increasing in some states, they remain “abysmal,” according to DiStefano. She recommends providers branch out to multiple states to ensure diversification of revenue.

The IDD industry once pivoted to involve mostly residential treatment as part of the movement away from institutionalization, according to Michelle Mainez, chief operating officer at Redwood Family Care Network. It’s now experiencing another dramatic shift.

“Now, we are at another historic kind of pivot in our industry with CMS, with the home- and community-based final rule,” Mainez said. “The final rule setting really takes the philosophy and the ideology of IDD being completely in inclusive environments and now says that is the standard. We’re also going back to those very same models and revisiting our facilities and residential settings to identify where we have those institutional practices still embedded in those small residential models.”

Headquartered in Modesto, California, Redwood Family Care Network provides person-centered IDD services, including residential facilities, home care, and supported and independent living. Webster Equity Partners invested in the company in 2021.

Michelle Mainez, chief operating officer of Redwood Family Care Network, speaks at the 2023 INVEST conference.

IDD services are almost exclusively reimbursed by waiver funding through CMS. Waivers are good for a patient’s lifetime, but many states have waitlists to acquire them.

Even if a state has no waitlist for waivers, patients may still struggle to get care because of a phenomenon called a “shadow waitlist.”

“In a state where they give you a waiver, you may go to the service provider and say, ‘I’m eligible for these three things,’ and the service provider would say, ‘Great, I only have staff to give you two of them,’” DiStefano said. “So while you’re not technically on the waitlist, you’re on a waitlist of another kind. That’s what we call a shadow waitlist from a waitlist. I think that’s an important fact for investors as well.”

Waitlists and shadow waitlists are two reasons that the total addressable market (TAM) for IDD care is different from the number of people diagnosed with IDD.

“I think that is a common investor mistake,” Pettit said. “[Investors may think] ‘Wow, that TAM is there, we just have to get it.’”

TAM is further limited by other factors unique to the “nuanced” world of IDD. For example, a residential facility must fill vacancies only after matching residents on behaviors, acuity and other factors, rather than filling the spots immediately.

“There’s so much that goes into person-centered planning in this model, that you really have to understand those nuances,” Mainez said. “There’s so much that goes into the partnerships with your regulatory agencies, … funding agencies, contracting agencies, case management agencies. They are the one-stop oversight. So you have to pour your attention into building those relationships and driving quality.”

Still, an “incredible volume” of deals with nonprofit organizations are being made, despite the complexity of the IDD industry. Two recent examples: IDD nonprofits Merakey and Elwyn have announced intentions to merge into a $1 billion company in March, and nonprofits I Am Boundless and Koinonia announced plans to merge in September.

“Our pipeline is full of nonprofit M&A to a level I’ve never seen before,” DiStefano said. “We are also starting to see some interest in joint ventures. We’re having some conversations now with forward-thinking private equity firms who want to partner with large nonprofits to create some kind of joint venture partnership.”

Not-for-profit organizations should not be overlooked as competitors in the field, Pettit said.

“With interest rates being where they are at and with some of the large transactions that got done by investment firms over the past few years, there are some ‘not-for-profit for-profits,’” he said. “They are not only viable competitors, but they have boards who will enable them to go after really interesting transactions. … Their tax status is different, but that’s about all. We view them very much as peers, and we will look at not-for-profits to hire great talent across a portfolio because I think that gap is more perceived than it is actual.”

Current challenges, opportunities for providers

Staffing has continued to be a challenge across the behavioral health industry, and the IDD segment is no exception. The workforce crisis is one of the top three issues for IDD service delivery, according to Mainez.

“Service delivery is going to look different,” she said. “It is going to change courses. We have to find resolutions to the direct care workforce shortage.”

DiStefano put an even finer point on the implications of staffing shortages.

​​”In IDD services, if you don’t have staff, someone could die because they rely on your care for basic living,” she said.

Along with staffing, CMS regulations are one of the biggest challenges in the IDD world, DiStefano said.

“We’ve been making these tiny little tweaks for decades,” she said. “What we need is a complete system overhaul.”

Even with struggles with CMS and staffing, opportunities are available for IDD innovators. Technology may be a bright spot, DiStefano said.

“I don’t mean technology that’s now table stakes, like remote monitoring and telehealth,” she said. “That’s not innovative. That’s just the same thing delivered in a different way.”

A forecast of increased tech aligns with opinions from other industry insiders, who said that more tech investment could expand access to care and care management, decrease health care spending and improve profitability.

For Redwood Family Care, leveraging technology is important, but it will not become a priority until more basic needs are met.

“[Technology] can enhance services,” Mainez said. “But at the end of the day, my No. 1 mission is recruitment and retention of our direct support staff, advocacy and a heck of a lot of grassroots efforts to make sure that our rates will support the wages that we need to pay in order to continue our mission to provide those world-class services.”

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