The substance use disorder (SUD) treatment industry was formerly dotted by small, local providers.
In the future, these mom-and-pop providers may go the way of cottage businesses during the Industrial Revolution.
To be clear, SUD treatment has not yet been completely limited to assembly lines. Small providers still abound.
At the recent Behavioral Health Business INVEST conference, SUD industry professionals from companies of almost all sizes shared strategies for growing their businesses, expanding service lines and addressing disparities.
But top of mind for SUD providers were forces that are changing the very nature of the SUD treatment industry: competition and consolidation.
These two concepts overlap and intermingle. While providers grow to increasingly mammoth sizes, competition to stay relevant rises. Operators are uncovering and fine-tuning tactics to stay competitive and grow their businesses and avoid getting left behind in the next generation of SUD treatment.
Among the topics in this BHB+ Update, I explore:
- How providers are staying competitive through service line diversification and other strategies
- The current investment and M&A landscape, including recent headwinds for buyout firms
- Strategies and challenges that arise when forging relationships with payers
Economic landscape
Consolidation in the health care space is nothing new, as we’ve seen with other segments. For example, the number of community hospitals that belong to a larger health system increased from 53% in 2005 to 68% in 2022, according to KFF.
As the SUD treatment industry matures, it too is becoming increasingly consolidated.
“It’s becoming really important to get scale, to invest in things like outcomes tracking and to build a repeatable product,” Christian Chauvet, partner at private equity firm Lee Equity, said at INVEST. “So we’re seeing the industry consolidate behind those who are doing that.”
New York City-based Lee Equity’s portfolio includes several behavioral health companies, including Summit Behavioral Health and Eating Recovery Center. In October 2022, the firm acquired Birmingham, Alabama-based SUD treatment provider Bradford Health, which operates centers in Alabama, Tennessee, Mississippi, North Carolina and Arkansas.
The number of behavioral health facilities involved in acquisitions has increased “substantially” over the last decade or so, according to a study published in Health Affairs Scholar. Researchers found that 32 behavioral health facilities were involved in acquisitions in 2010. That number skyrocketed to 1,330 in 2021, and other data from industry M&A firms confirms that the trend has continued in the years after.
Private equity’s involvement in the SUD treatment industry also exemplifies the broader trend of consolidation in this sector.
Private equity-owned SUD facilities make up 7.1% of all SUD facilities, according to a study based on data from 2021 to 2023. This figure varied among states, however, with Virginia having the highest rate of private equity ownership at 22.1%.
Dealmaking in the behavioral health industry has leveled off since it reached never-before-seen levels in 2021, however.
“In the United States, in 2021, private equity closed 50% more deals than its previous record,” Dexter Braff, president of The Braff Group, said at INVEST.
While dealmaking has recently dipped, there’s a compelling case for why it will rebound in 2025.
Braff predicted that 2025 would be the best year for dealmaking in the behavioral health industry since 2021, due to aging dry powder necessitating PE spend, a narrowing valuation gap and lowering interest rates.
Generally, the SUD treatment industry has seen less action compared to outpatient mental health or other behavioral health segments, though.
“No real explanation for that,” Braff said. “I wouldn’t get overly concerned, but it is up from where it was in 2023.”
A new consideration
On Oct. 10, the Federal Trade Commission (FTC) unanimously voted on a final rule to increase federal oversight on M&A. The final rule expands the Hart-Scott-Rodino (HSR) Act and requires certain parties involved with M&A transactions to submit premerger notification forms that allow federal agencies to complete a premerger assessment.
The FTC’s ruling comes less than a year after the Biden-Harris administration announced initiatives designed to increase dealmaking surveillance in the name of preventing higher medical costs for patients.
Some research has shown that health care consolidation often raises prices without notably increasing care quality.
Greater oversight can slow down dealmaking momentum and “be a pain,” Braff said at INVEST, but more time between signing a letter of intent and a deal closing doesn’t stop parties interested in SUD dealmaking from getting involved.
SUD providers looking to quickly scale, or investors looking to acquire, may therefore run into new hurdles post-the expansion of the HSR Act that mitigate some economic tailwinds. It’s doubtful that the FTC’s ruling will stop (or even considerably slow) the consolidation of SUD providers.
Payer relationships
At INVEST, it was clear providers were looking for ways to stand out from the crowd, possibly attributable to increased pressure from growing consolidation. One of the most frequently discussed (and sometimes whispered) topics was payer relationships.
Patients’ ability to use in-network benefits is associated with better retention in SUD treatment. A study published in Health Affairs Scholar found that patients who were able to pay for services through insurance were 50% more likely to stay in care for at least six months compared to cash-pay patients.
Offering in-network payment options also allows behavioral health providers to grow quicker and have better returns. These factors make in-network providers much more attractive to investors.
While going in-network is key for providers looking to improve outcomes, expand patient bases and stay competitive, research shows that the vast majority of SUD treatment providers still primarily accept cash for their services. Allowing patients to pay with insurance may therefore be the most sure-fire way to stand out from the crowd.
But negotiating with payers isn’t easy.
To do so, providers must demonstrate that they can meet payers’ needs, according to Roy Serpa, chairman of the board and co-owner of T&R Recovery Group.
Privately owned T&R Recovery Group is an addiction, mental health and trauma treatment provider that operates facilities in Arizona, Florida and Texas. The Tucson, Arizona-based provider added four locations to its portfolio in May with its acquisition of Origins Behavioral Healthcare.
Serpa recommended that payers first research their local marketplace to understand the state’s general access to care. Next, providers must acquire data about competitors’ rates and complete multiple SWOT analyses.
Then, even more research is necessary.
“What’s your payer strategy related to how to develop, not just having outcomes and an excellent clinical model, but the relationships with the payer at the highest levels,” Serpa said. “Is it bringing somebody on board [who’s] full-time in your back office and corporate office, or is it a consultant [who] probably was in the payer world before?”
This consultant can support efforts to get higher rates, Serpa added.
Payer expectations vary by service line and state, according to Josh Scott, CEO of Guardian Recovery.
“There are standards, expectations and requirements by the payer that are critical to maintain, and they’re varied,” Scott said. “What we’ve done is, and I highly recommend something along these lines, build a compliance tool. We have a quality assurance tool that is algorithmic and monitors our medical records documentation and looks for the presence of documentation and quality of documentation.”
Delray Beach, Florida-based Guardian operates 17 physical SUD and mental health treatment clinics and a virtual care option.
Guardian’s tool is proprietary, Scott said, but is fairly basic in that it only must understand documentation requirements and then complete spot audits.
Service line diversification
Having varied services available for patients once they are in treatment is likely equally crucial to offering in-network payment options.
An integrated treatment model, coupled with early detection, leads to better outcomes for patients with SUD and co-occurring disorders, according to the Substance Abuse and Mental Health Services Administration. Diversified services can also improve patient acquisition costs.
Universal Health Services (NYSE: UHS) has focused on diversifying services at the outpatient level and seen significant impacts on compliance and outcomes, according to Chad Koller, divisional vice president of SUD.
King of Prussia-based UHS operates over 400 facilities, including behavioral health facilities, acute care hospitals and ambulatory centers.
The provider has primarily diversified its services through organic growth, Koller said.
“At some of the outpatients, it could be as simple as hiring two or three therapists,” Koller said. “Many of our [SUD] payer contracts also have a mental health piece that’s transferable. We could get a program that’s doing SUD primarily to do mental health primarily off the ground in three to six months.”
Along with adding significant value to patients, integrated care models also offer significant business and payer benefits, according to Nick Stavros, CEO of Community Medical Services.
“We’re constantly looking at the most significant things we could add. It’s value added to the provider because it bends the cost curve.”
Nick Stavros, CEO of Community Medical Services
Scottsdale, Arizona-based Community Medical Services operates 70 SUD and mental health treatment facilities across 12 states.
Executing something that offers a triple crown of benefits to patients, payers and the provider is a “no-brainer,” Stavros said.
Benefits to the provider also include distinction among peers in an increasingly populated market. A full continuum of care differentiates Bradford Health from its competitors, who often limit services to one or two areas within SUD, Bradford CEO Rob Marsh said.
“So many providers are just focused on inpatient or detox or [residential] or simply outpatient,” Marsh said. “It’s not unusual for a client to enter our facilities through detox and then work their way through residential, [partial hospitalization program] (PHP), [intensive outpatient program], and ultimately, even sober living and supportive housing that we provide. We’ll take that all the way to [medication-assisted treatment] (MAT) services and outpatient services.
Companies featured in this article:
Bradford Health, Community Medical Services, Guardian Recovery, Lee Equity, T&R Recovery Group, The Braff Group, Universal Health Services