Macroeconomic factors, including interest rates and inflation, are beginning to improve, creating tailwinds for the substance use disorder (SUD) treatment industry.
Lingering impacts of now-improving economic turbulence will continue to affect the industry, however.
In turn, investors have had to become more disciplined, industry experts said at the Behavioral Health Business INVEST conference. Operators, meanwhile, are coping with disproportionate reimbursement rates while looking to expand into the SUD industry’s promising “new frontier.”
“Interest rates are certainly a complication,” Christian Chauvet, partner at Lee Equity, said at INVEST. “The good news is, they’re coming down, but the increase in interest rates has made the cost of funds higher for our operating companies. It’s made the cost of funds higher for leveraged buyouts, which is the business we’re in, and, ultimately, that has put pressure on our ability to pay and finance large capital projects.”
The Federal Reserve announced a one-half-percentage-point rate cut on Sept. 18, and experts predict additional cuts in months to come, all of which is good news for the behavioral health industry.
New York City-based Lee Equity’s past and present portfolio features several behavioral health companies, including previous investments 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.
Lee Equity has continued to grow despite these headwinds through increased discipline, Chauvet said.
Prompting the Fed’s rate cut, inflation rates reached a year-over-year three-year low in September. Nonetheless, some SUD providers may have been impacted by previously high rates more than others.
“In a business with heavy government reimbursement, you’re oftentimes a price taker in terms of your rates and revenue, so it can be difficult to pass on your inflationary costs to your customers and the payers,” Jonathan Merber, principal at LightBay Capital, said at INVEST. “We’re seeing that soften, which is a great tailwind for the space. But inflation has been really tough, especially in more fixed costs or higher fixed costs residential models.”
Los Angeles-based private equity firm LightBay Capital invests in health care, business services and consumer businesses with $100 million to $300 million in equity.
While inflation negatively impacted SUD providers, rates are still cooling, improving investment sentiment, Merber said.
Reimbursement rates are also leading to tribulations for industry providers, according to Rob Marsh, CEO of Bradford Health Services. Medicaid – and, sometimes, Medicare – rates are often disproportionate and fail to cover expenses for quality services, he said.
Bradford Health provides inpatient, residential and intensive outpatient services as well as partial hospitalization programs (IOPs/PHPs) in the Southeast. The provider acquired multi-facility provider Lakeview Health in September, five months after Marsh took the helm as CEO.
The VA Community Care Network (CCN) has also contracted, Marsh said, further limiting reimbursement from government payers.
“It’s caused a giant ripple effect within the industry, where we see some providers actually folding as a result of not having that reimbursement from the VA,” Marsh said. “We’re hopeful that post-election and [with a ] new budget the VA client will return and we’ll see a change in policy,” Marsh said.
But for now, Bradford will continue as if that reimbursement will never come back and instead pivot toward other opportunities.
While economic factors complicate the realm of SUD investment and operation, significant opportunities still exist, particularly if interested parties know where to look.
“Nobody wants to hear [this], but AI really is where the industry is going to be headed over the next five years,” Marsh said.
New technology like wearables could drive the industry forward, he said, by informing providers of patients’ physiological or behavioral changes that could signal a relapse.
Technology will also play an increasingly important role in collecting data to demonstrate efficacy to payers, Merber said. Outcomes data will be crucial to entering into innovative reimbursement structures, he said.
Remote monitoring, along with in-home treatment and other less-intensive forms of SUD treatment are the “new frontier,” Marsh said. While in-person and intensive options will always have a place in the continuum, he said, patients increasingly want to receive treatment from home. Providers looking to enter these spaces would be best served to do so through partnerships, he added.
Innovative new models aren’t the only places worth exploring.
The need for SUD services in general remains exceptionally high, with only one in four Americans who need treatment receiving it in 2023, according to the Substance Abuse and Mental Health Services Administration (SAMHSA).
High levels of need mean traditional, tried-and-true SUD modalities still can impact large numbers of lives while generating impressive financials, according to Merber.
“As we’re looking at where to put capital to work, where we can build a large business that’s able to have a real impact on the community and generate great financial results as well, we think there’s a lot of runway in areas like traditional [residential treatment centers] (RTC), PHP, IOP, more outpatient models,” Merber said.
Fast forward to five years from now, and the SUD landscape will have “substantially” more freestanding PHPs and IOPs, Chauvet said.
