Wellpath’s $425M Behavioral Health Division on the Market Following Bankruptcy Announcement

A behavioral health enterprise with $425 million in revenue is on the market and potentially at a discount to typical market rates.

Wellpath, one of the nation’s largest providers of prison-based and outsourced behavioral health care, is seeking the sale of its behavioral health division, according to bankruptcy documents. The Nashville, Tennessee-based provider hopes its Recovery Services division will net at least more than $375 million.

The company filed for bankruptcy on Nov. 11. Publicly available documents spell out the company’s plan to potentially accelerate a piecemeal sale of Wellpath’s various parts related to behavioral health services. They also spell out how a private equity-funded company ultimately failed to balance its growth, leverage and the challenges of the health care industry.

“After evaluating our options, the board and management team determined that a court-supervised process to facilitate a sale of our Recovery Solutions and a separate reorganization of Wellpath Correctional Healthcare is the best path forward to strengthen our financial foundation and stabilize Wellpath for the long-term,” Ben Slocum, Wellpath’s CEO, said in a news release. “This action will enable us to continue providing for our patients, clients, providers, and team members as we deliver essential services to vulnerable populations.”

It’s not clear how the prospects of the Recovery Solutions division sale will change under bankruptcy court supervision. Throughout much of 2024, Wellpath has tried to sell the Recovery Solutions division to pay down a major portion of its debt and get an extension on the remaining amounts owed.

The company has loan debt coming due totaling $644 million by October 2025.

The previously unsuccessful sales process started in January with the financial services firm Lazard Frères & Co. LLC preparing the company’s marketing process, which proceeded in earnest in April in partnership with the health care investment bank MTS Health Partners. The sale was also tied to an effort to resolve its issues with creditors out court.

The process netted 70 prospective bidders signing confidentiality agreements but only one second-round check-in bid, which was lower than the bidder’s first pitch. None of the bids were acceptable, and, by September, Wellpath and a group of its creditors began working on an in-court proceeding. On Nov. 11, the two parties executed a restructuring support agreement.

The agreement includes a provision for an accelerated bid process for the Recovery Services division, which would span six weeks from the start of the proceedings “to market and consummate the sale of the RS Division assets.”

“Given both (a) the extensive marketing process that occurred prepetition, (b) upcoming contract renewals, and (c) the vulnerable patients the RS Division serves, this expeditious timeline is warranted under the circumstances,” the court documents state.

The deadline for bids for the Recovery Solution division is 4 p.m. Central on Dec. 13, according to a legal notice published in USA Today. An auction for this and other assets is scheduled for Dec. 16. A sale hearing before the judge over the case is set for Dec. 23. 

The restructuring support agreement includes an unnamed stalking horse bid from Wellpath’s creditors that totals $375 million, effectively acting as a floor for any incoming bids.

The Recovery Solutions division encompasses 3,700 clinical staff caring for about 3,000 patients in 70 facilities across 10 states. It provides services in prisons, jails, state hospitals, forensic treatment and civil commitment centers. It also offers community-based services, including a handful of private, standalone facilities such as the NeuroBehavioral Hospitals in Florida and the Alpine Special Treatment Center and Harborview Center facilities in California.

What pushed Wellpath to bankruptcy

Wellpath maintains that “escalating operating and labor costs, rising professional liability expenses, and underperforming contracts” largely drove the company to seek bankruptcy protections. Its revenue had grown steadily, an average of 18% per year, between 2006 and 2022. In that year, its total revenue reached about $2.06 billion.

The documents BHB reviewed did not explicitly state what Wellpath’s revenue in 2023 was. But revenue totals from its divisions put the number near $2.2 billion.

The challenges described in the court documents are familiar to many in health care. Central to several specific issues: COVID drove up medical supply costs, clinical labor costs and utilization in the near term and fundamentally shifted the health care industry in many ways thereafter, including sending all prices skyrocketing.

Wellpath also states in the court documents that it was not eligible to get stimulus or aid funding from the American Rescue Plan Act or Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The company also points to a spike in expenses in professional liability insurance related to settled lawsuits from terminated contracts with clients. It also points to underperforming contracts. In a few cases, those contracts were based on what is now seen as faulty data. The court documents state that two contracts in Michigan and Georgia alone led to $40 million in losses.

The company’s failure to sell the Recovery Solutions division led to Wellpath seeking and getting forbearance agreements from certain creditors and the work on the in-court restructuring.