Entering new markets can be challenging for behavioral health providers. But de novo expansion is often a savvy strategy if they can land the jump.

“[Mergers and acquisitions] is the fastest way to grow, but the most economical, the most return on investment is definitely de novo,” Dan Davidson, managing director at Brentwood Capital Advisors, said at the Behavioral Health Business INVEST event in October.

Davidson has advised 40 behavioral health companies, including several that expanded through de novo.

De novo is a smart, long-term strategy, according to Tani Weiner, co-chair of the Behavioral Health Group at Polsinelli law firm.

“De novo has been a steady channel of growth, particularly as we’ve had a slower M&A economy in the last two years,” Weiner said at INVEST.

But there are several boxes to check in expanding to a new market. One is fit, according to Chris Dooney, vice-president of finance and development at BrentCare Behavioral Health.

“Our programs are really experiential,” Dooney said at INVEST. “Here in Dallas, we have a really ranch feel. And so we would not want to move to New York City.”

BrentCare Behavioral Health operates adolescent mental health and substance use disorder (SUD) clinics in Dallas and Miami.

Dooney, who previously worked at CenterPointe Behavioral Health System, said that he has observed companies successfully expanding their reach via concentric circles, so they are familiar with a new market’s payers and pool of qualified clinicians.

Davidson tells his clients to look at a few key factors in any potential market: Competition from other providers, the supply of possible clinicians, and reimbursement and payer dynamics. Clients should contact insurers and the respective state’s Medicaid program before entering a new market.

“One thing that I found helpful is to actually call the payers and ask for their availability to sign contracts,” Davidson said.

Other challenges revolve around legal compliance. Each state has different licensing requirements for a new behavioral health operation, Weiner said. Plus, there are the vagaries of county and city government zoning laws.

“The gold standard is to find someplace where you can operate by right,” Weiner said, meaning they do not have to request a zoning variance.

Otherwise, providers looking to buy or lease property can face Not In My Backyard attitudes, or NIMBYism, where local residents express fear that a mental health and SUD clinic would bring dangerous people into their community.

“With NIMBY, you have to go to town hall meetings and make sure that the location that you found, which is not always easy to find, is in the right neighborhood and that the neighbors will allow you to run a facility,” Davidson said.

Providers could seek legal action if a local government outright denies a new facility.

Courts across the country have ruled that blocking a treatment center can be tantamount to discriminating against the clinic’s potential patients, who may have protections under the Americans with Disabilities Act. On the other hand, providers must be committed enough to a project to enter a legal dispute,

“The law is fairly favorable to providers in this respect,” Weiner said. “It is just the issue of how much it is going to cost and how long it is going to take.”

One possible solution in finding a new location is the conversion of an existing facility, like a nursing home, that might be zoned the same way as a treatment center.

“It can be jumping into existing leases at below-market prices,” Dooney said. “The speed of getting into these [new facilities] is important.”

Dooney said that a well-run de novo partial hospitalization (PHP) or intensive outpatient program (IOP) can become a break-even operation within a year. The time frame might be longer for residential clinics, Dooney said.