The distribution of for-profit and nonprofit behavioral health organizations varies widely across the U.S. Some states have high percentages of for-profit providers, such as North Carolina, with 51%. In contrast, others, like North Dakota, rely almost exclusively on nonprofit and government-operated organizations.
Regulatory, economic and demographic factors may explain differences in for-profit and nonprofit provider concentrations. These conditions require careful analysis when providers seek to expand to a market in a new state, industry insiders told Behavioral Health Business.
Providers who fail to do their homework before a geographic expansion may miss out on more favorable regulations and be less successful at building community relationships. Some private equity-backed providers who entered the behavioral health market in 2021 are now experiencing these consequences, according to Stacy DiStefano, CEO of Consulting for Human Services (CFHS), a behavioral health-focused consulting firm.
“We started to see over the last few years the fallout of providers who are not strategic,” DiStefano told BHB. “Because your first impression is some of your most important work.”
To fully assess the favorability of a certain state, some providers contract with outside consultants and provide recommendations based on that state’s favorability and the provider’s goals.
CFHS creates personalized state favorability guides for its clients, providing scores for each state based on multiple factors critical to the specific organization.
Other organizations, often larger operations, guide their expansion through their own business development teams. Mental health provider Hightop Health leverages both third-party resources and advisors as well as internal diligence, according to the company’s senior vice president, Josh Baker.
Atlanta, Georgia-based Hightop is an outpatient mental health provider backed by private equity firms JLL Partners and SV Health Investors. The company acquired Psych Atlanta in October 2023 and moved into Austin, Texas with its acquisition of Roots Behavioral Health in February.
Baker said determining the right path for geographic expansion requires a significant amount of time.
“We entered our second market in December of 2023,” Baker said as an example. “I anticipate that we will spend the bulk of this year evaluating new markets that we may want to enter. There may be an opportunity where we go into a third market towards the end of this year that may trail into 2025.”
Factors that matter greatly to for-profit providers may not substantively impact nonprofit providers and each provider must consider its goals when assessing where to grow its operations. These types of providers have historically had different approaches to risk tolerance.
“The nonprofit mentality has for so long been managed to zero; as long as we break even, we’re okay,” DiStefano said. “A nonprofit could have a 3 to 5% margin and their board would be happy with that. A private equity backer would be looking much higher for their shareholders to be happy.”
Expectations for a lower profit margin allow nonprofits to operate in areas that for-profit organizations are not interested in, which can increase access to care for people who otherwise would lack access to behavioral health care.
Providers may opt for more risk and less favorable conditions if expanding in a state they already operate in. In these cases, a provider may be able to carry some shared services across different states or avoid having to build out its executive team.
While each behavioral health provider must assess its goals, certain state factors are amenable to for-profit, nonprofit and not-for-profit providers.
“I don’t know of a state that is favorable for for-profit, which is not favorable for us,” David Guth, CEO of Centerstone, told Behavioral Health Business. “I can think of a few states where it’s not favorable for anybody … . but you won’t you won’t find much of anything there except public sector systems and you’ll see them struggling mightily.”
Centerstone is a not-for-profit behavioral health care organization that provides mental health and substance use treatment, education and support in North Carolina, Florida, Indiana, Illinois and Tennessee. The organization operates approximately 70 residential facilities, offers school-based counseling services in over 850 schools and provides therapy services to approximately 1,500 military service members and veterans.
State favorability factors
Regulatory considerations are crucial for both for-profit and nonprofit behavioral health providers.
Even after entering a state, regulations can change and substantively impact a behavioral health business. Centerstone originally found Indiana to have very favorable conditions but has since encountered challenges in the state. The organization has not had rate increases in the state from either Medicaid or state funded services, in “a long time,” Guth said.
“They’re in the process of going through a transition to CCBHC status as a state,” Guth said. “From the state’s perspective that is going to offer some opportunities for a better match from the feds, but also a really more effective reimbursement system for the mental health center. The last two years have been a real challenge in Indiana.”
Despite these challenges, Centerstone has no plans to leave the state.
“We’re not cutting and running,” Guth said. “We feel a very deep commitment to the communities that we serve.”
For-profit operators also have to be aware of government regulations.
“When there is more government involvement from a reimbursement standpoint, that may make it more challenging for the general population of market participants to be able to appropriately staff and support their operations,” Baker said.
Other regulatory considerations include Medicaid expansion and telehealth regulations.
“We need to be mindful of all of the regulations in place on a state-by-state basis to make sure that our current protocols and general business model comport with the requirements in those states,” Baker said. “There will definitely be states that are less attractive from the business standpoint due to additional hurdles that we may need to augment our operations to accommodate.”
The overall economic health of a state can affect the viability of behavioral health businesses, DiStefano said. While wealthier states or those with higher rates of private insurance coverage may offer more lucrative opportunities, cost of living can make it difficult to attract employees.
Provider saturation is also a key consideration. Areas that have a medication-assisted-treatment (MAT) clinic on every corner, for example, may not be the best fit for a substance use disorder (SUD) operator to move to.
Along with assessing its competition, Hightop also determines the general quality of health care in an area to ensure it can successfully refer its patients to other health care organizations to ensure a continuum of care.
One of the most important factors for Hightop is the availability of a quality workforce. The company may be attracted to areas with academic facilities or desirable places to live.
“First and foremost, our emphasis is on delivering quality clinical care,” Baker said. “That’s going to be driven by the ability to recruit the right talent to help us out in those areas.”
High costs of living can also make acquiring talent difficult, adding an additional consideration onto providers’ plates.
“You’ve got people who are doing the public sector work because our heart is there,” Guth said. “But if providers can’t pay them reasonably well the heart can only go so far, they still have families to support.”
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