Investors Favor In-Network Behavioral Health Providers for Faster Growth, Returns

Despite the higher reimbursement rates from private-pay models, investors are shifting their focus to in-network providers who offer stability.

In-network behavioral health providers have faster growth, quicker revenue cycles and better overall returns, industry insiders told Behavioral Health Business. Although developing relationships with payers can be hard work, it can pay off with investors.

Private equity firm Shore Capital invests exclusively in in-network businesses, a technique that has proved successful.

Chicago-based Shore Capital has invested in six behavioral health businesses, with around 40 health care deals total. The company has approximately $6 billion in assets. Its portfolio includes speech and applied behavior analysis therapy (ABA) provider Behavioral Innovations as well as outpatient substance use disorder (SUD) provider Brightview.

“Reimbursement models have always been very, very important to us,” founding partner John Hennegan told Behavioral Health Business. “Shore Capital has admittedly favored an in-network model since inception. We have not ever done a deal that is primarily out-of-network.”

Despite the long-term benefits of in-network care, the timeline of developing relationships with payers can be sluggish and the collections process can be difficult.

Private pay benefits

Private pay organizations can appear extremely attractive at first glance.

“There’s a lot of out-of-network providers that have chunky EBITDA or a really nice top line,” Craig Sager at Provident Healthcare Partners, said.

Provident Healthcare Partners is a health care banking service with offices in Massachusetts, California, New York and Minnesota.

Despite the chunky EBITDA, private pay models carry a certain amount of risk, Scott Sarnacke, chief financial officer at Odyssey Behavioral Healthcare, told Behavioral Health Business.

“There’s always that conversation of, ‘If we get into a recession, what does that do to your private pay business?’ That’s always an unknown risk,” Sarnacke said. “The reality is we’ve never seen real dips in our private pay business through ups and downs. There’s just always a high demand for high-quality health care. People will pay for it. But the network is a nice, stabilizing base.”

Brentwood, Tennessee-based Odyssey Behavioral Healthcare offers a full continuum of care for eating disorders, psychiatric disorders, dual diagnosis and other addictive disorders, although it recently scaled back its eating disorder locations. The company has more than 50 treatment locations in nine states.

Despite historically investing in in-network businesses, Hennegan says there is a place for out-of-network deals in the investing ecosystem.

The case for in-network

Although private pay models boast higher reimbursement rates, investors are more interested in the faster growth associated with in-network models.

“A typical timeline to get paid for an in-network claim is maybe 30 days,” he said. “If it’s Medicaid, that can be as fast as five or six days. If you’re out-of-network, it’s a multi-month process.”

“We’d rather take that energy and put it into training the next generation of providers,” he added. “Take that energy and put it into constructing the next clinic or entering the next state.”

Behavioral health is experiencing a “flight to quality,” according to Hennegan. Because fewer deals are closing, investors are more focused on finding high-quality providers.

“Typically, being in-network means that you’ve passed some sort of credentialing process, some sort of verification process, that is a mark of quality,” Hennegan said.

Along with high quality, in-network models can result in higher patient volumes. But switching to in-network isn’t an “easy button,” according to Scott Sarnacke, chief financial officer at Odyssey Behavioral Healthcare.

“There’s a volume fallacy that if you go in-network, the payers will send you business,” Sarnacke said. “That’s just not truthful. For the most part … payers are generally not in the business of directing patients from one organization to another.”

Providers still have to do the “hard work” of educating the market on their company’s services to acquire patients, even with in-network models.

In-network models can mean significant cost savings and more consistent care for patients.

While some clinicians guide patients to make out-of-network claims, not having contracted rates can mean hefty bills for patients.

“When you’re out-of-network, the rates are at a premium and really high, but a lot of that is getting passed off to the patient,” Sager said. “Unfortunately, that’s not where we need things to go in health care and behavioral health.”

Higher price tags can keep patients from getting needed care. According to KFF, six in ten uninsured adults skipped necessary health care due to prohibitive costs.

Racial disparities can further increase the impact of inaccessible care. Among white, non-Hispanic adults, 39% said it was somewhat or very difficult to afford health care costs. Among Black and Hispanic adults, that figure jumps up to 60% and 65%, respectively.

In addition to higher costs for patients, out-of-network models can mean diminished long-term returns for investors who may eventually seek to convert to in-network, resulting in lower reimbursement rates.

“If in-network gets paid $50 for a service and they’re billing out-of-network at $100, the way we would look at it is on a pro forma basis,” Hennegan said. “If you took all those $100 payments and changed them to $50 payments, what would the earnings stream look like? It’s going to be materially smaller.”

Still, converting to in-network is a good option for long-term results.

“We’ll usually bring in a consultant or do back-of-the-napkin math,” Sager said. “It will say, ‘If you move to in-network with payers in your state, whether it’s Medicaid or commercial players, the rates are going to drop, but the flip side is the volume is going to go up.’”

Creating in-network models

While in-network reimbursement models might be more attractive to investors and make for better bottom lines, cultivating relationships with payers can be time-intensive and complicated.

Odyssey was originally a private pay organization and is now predominantly in-network. That process started at a payer’s request, which Sarnacke said is preferable because payers already have a need that providers can then fill.

Generally, the key to starting the conversation is to find clinical overlap between what a provider does well and what a payer needs in a specific market.

The timeline for building relationships has gotten more extensive since COVID-19, Sarnacke said.

“​​In most markets [the increase in time frame] is probably double,” he said. “So if something used to take 60 days to get done or 90, it now takes between 120 to 180.”

The longer time frame is still not a guarantee for a finished deal, Rush Brady, Odyssey’s vice president of finance and development said.

“That’s if you can find somebody to engage with who is responsive and willing to explore a relationship and that’s definitely not a guarantee in this environment,” Brady said.

The negotiations and extended timeline results in sustainability and consistency of reimbursement, as well as access to care for patients.

“We made that decision that while it can be a challenging, less efficient way to run your business from collections, it also provides access to the care that you provide to a much broader audience,” Sarnacke said.