From sluggish to stagnant, 2024’s behavioral health narrative has been a study in inertia. But I think the next chapter may have some more action, as private equity investors face immense pressure from limited partners to start the buying and selling process.
But it isn’t just traditional PE investors excited to return to mental health investments. We’re seeing more payers and health systems pour money into behavioral health startups, potentially driven by the urge to control behavioral health spending. This has become a significant expense, especially for payers since the COVID-19 pandemic.
And while I put more M&A activity on the top of my 2025 predictions, I don’t think every part of the industry will see rapid changes.
Behavioral health has been talking about the move towards value-based care for years (we even have a whole conference dedicated to the topic!). Still, the movement in this space is slow. And I think there will be some intermediate steps to take before we see true value-based care in the sector. I’m predicting providers start dipping their toes into the value space with bundled contracts.
But that’s not the only payer trend I’m watching. The unsettling lack of public sympathy following the tragic death of UnitedHealthcare CEO Brian Thompson has spurred conversations about payer denial practices and the public’s perception of these entities. This spotlight could make many payers reevaluate how certain claims, including mental health, are covered.
With a new administration taking over in just a few weeks, an overdue M&A rise and more investors jumping into the behavioral health space, it’s bound to be an interesting 2025.
In this week’s exclusive, members-only BHB+ Update, I examine:
– Why non-traditional investors could be behavioral health’s unexpected benefactor
– How bundled payments could be the first step to value-based contracting
– Why non-profits and small providers could be a hidden gem for buyers
Traditional PE investors will begin to buy providers historically under the radar
Despite a slow 2024, providers are still largely excited about buying in the behavioral health sector.
Still, in an industry dominated by mom and pop providers, there are only so many large platform companies to acquire. Instead, savvy investors may look outside the traditional large private provider groups to smaller providers and nonprofits.
These deals are typically more complex for a few reasons. Smaller providers often lack the sophistication of major platform companies that another PE firm has previously owned. We’re talking about some providers still using paper for health records.
Additionally, if a PE investor is interested in acquiring a nonprofit provider, it often means a lot of red tape. It could also lead to the attrition of certain mission-driven clinicians.
Even with these evident challenges, there are a few major advantages to taking this route. For starters, over the last few years, investors bought traditional PE-backed platforms at sky-high valuations. While those valuations likely won’t stay at those highs, the mix-match of expectations has made it difficult for deals to close.
However, non-traditional targets are, in some ways, outside of that loop. Additionally, there could be less competition for these providers from traditional PE backers who tend to buy and sell companies from other investors.
The other key advantage is that smaller organizations and non-profits often have deep community bonds. These providers often have community trust and a client base already loyal to the provider.
M&A will pick up quickly
BHB predicted M&A deals would quietly start picking up last year, and we weren’t wrong necessarily. But they did so in a whisper.
I’m predicting more of a shout this year. At BHB INVEST, Dexter Braff, president of M&A advisory firm the Braff Group, had some really strong points that convinced me 2025 will be a hot year for M&A.
Private equity firms are holding their behavioral health assets far longer than typical investment timelines would dictate. In many cases, this has caused limited partners to put pressure on investors to get back into the M&A market.
Additionally, by the end of the month, a new Trump administration will be in power. Many in the behavioral health industry see this administration as more “business friendly” than the previous administration. There will likely be less federal scrutiny by the Trump administration in private equity’s role in health care.
On the macro level, interest rates are beginning to fall, which could mean that the M&A environment could start to heat up.
In July, BHB reporter Chirs Larson compiled a list of the most likely behavioral health companies to sell. We haven’t seen an exit from the bulk of those companies – yet. But I would place bets on at least some of these companies announcing a sale in the near future.
Fee-for-service out, bundled payments in
Value-based care – everyone wants in. No one knows how to get in. To complicate matters, the definition of value-based care can change depending on who you are talking to. Some providers are exploring at-risk payment models, others are looking at shared savings-only models, and some are just hoping to improve the value of their care.
A concrete move that would push the dial towards alternative payments and away from fee-for-service contracting could be more bundled payments. Though bundled payments are not necessarily part of value-based care, the structure lends itself to incentivizing care quality.
Bundled payments – sometimes called the episodic payment model – give providers a set amount for caring for a patient or population. The model has inherent risk for the provider, but could also come with rewards.
These types of contracts are common in the labor and delivery space and other types of physical health care. And while many in the behavioral health industry aren’t ready to assume this level of risk, there are examples of these agreements in the sector.
For example, in 2016 Anthem Blue Cross and Blue Shield of Connecticut partnered with Aware Recovery to secure a monthly bundled payment for the totality of their services.
And more could be on the horizon as the industry moves towards collaborative care.
Non-traditional investors continue to make moves in behavioral health
Since 2020, the behavioral health segment has become somewhat of an investor darling.
Private equity investors have poured billions into traditional brick-and-mortar providers. Meanwhile, venture capitalists have invested heavily in digital mental health providers.
But more recently, we have seen non-traditional investors get involved in the space.
“Mental health is a global issue,” Heather Gates, audit and assurance private growth leader at Deloitte & Touche, told me at the beginning of January. “I think, as a result of that, it lends itself well to a venture model that expects outpaced returns and also lends itself to, I’ll say, non-traditional VCs. So think about the venture capital arm of a corporation that provides hospital services or what have you. We’re seeing those folks invest. We’re seeing global sovereign wealth funds and hedge funds [participate].”
Within the last year, we’ve seen the venture arm of both payer and health systems invest in the behavioral health sector. For example, CVS Ventures participated in autism provider Cortica’s latest $40 million funding round and virtual PTSD care provider Nema’s $14.5 Series A funding round.
Additionally, large health systems are also investing through their venture arms. For example, Mass General Brigham Ventures has invested in pediatric behavioral health provider InStride.
As behavioral health costs creep up for payers and providers, it makes sense to start investing in potential solutions that could cut some of the medical spend and provide more access to services.
Health plans under the spotlight for coverage
The murder of UnitedHealthcare CEO Brian Thompson exposed the public’s deep-seated resentment toward health insurance companies. This has spurred a larger public discourse regarding payer denial practices.
And shareholders are now putting pressure on the payer to examine some of its policies. Specifically, earlier this week, UnitedHealth Group (NYSE: UNH) shareholders requested a report regarding the insurance company’s “practices that limit or delay access to healthcare,” according to Reuters.
While the payer says it approves and pays roughly 90% of medical claims upon submission, I expect the company to face increased pressure to share data about its denials. Some members of Congress in 2024 actually called UnitedHealth Group out for its practices around Medicare Advantage (MA) prior-authorization requirements and its MA claims denials.
This increased scrutiny on payer coverage comes amid an ongoing discussion about parity for behavioral health coverage. Payers have been required to cover behavioral health on par with physical health care for more than a decade. Still, the federal government has largely lacked the teeth to enforce these regulations. But that could be changing.
In September, the Biden administration released a final rule called The Mental Health Parity and Addiction Equity Act (MHPAEA), which updated how health plans can limit behavioral health benefits. Specifically, it requires and spells out how health plans analyze nonquantitative treatment limitations (NQTL) for both types of benefit and requires plans to remedy disparity, including prior authorization and other medical management techniques.
Behavioral health advocates have largely applauded the rule for stronger enforcement provisions. However, payers have called the legislation vague and onerous.
Still, between the growing public discussion around payer coverage and the new mental health parity regulations, I predict there will be a growing pressure on payers to cover mental health services.
