This is an exclusive BHB+ story
A rash of brutally negative press for some of the nation’s largest behavioral health providers may encourage the primarily nonprofit American hospital sector to look for potential partners that look like them — in other words, to be nonprofits.
According to a handful of interviews and networking conversations I’ve had, the headline risk associated with just a handful of leading organizations may be enough to change who these hospitals are willing to do business with.
To be clear, I’m not suggesting that the common practice of specialized for-profit organizations doing joint ventures with nonprofit health systems is no longer relevant. There is just too much of a need for new services, new facilities and expert organizations to create them. Plus, the collective lack of investment by both the public and private sectors in behavioral health services during the last 30 years or so of hospital consolidation has created a decrepit non-governmental psychiatric hospital system.
Still, we are seeing a confluence of trends that may inspire skepticism on the part of nonprofit hospital leaders when it comes to working with for-profit entities.
In this exclusive BHB+ Update, I’m going to dive into:
— Why there is greater skepticism about for-profit JV partners
— The vital differences between for-profit and nonprofit organizations
— What the industry can do about it
The far reach and long tail impact of year’s worth of really negative press
It’s hard to objectively measure the impact of bad news. But from recent learnings from my work, the impact of the New York Times and other news media exposés involving Acadia Healthcare Co. Inc. (Nasdaq: ACHC) and the huge judgment awards against Universal Health Services (NYSE: UHS). Acadia Healthcare has also been on the wrong end of that kind of court action as well.
These are obviously huge black eyes for these companies. The behavioral health industry as a whole bears the brunt of this damage, as these companies are the largest and most prominent in the sector. Until recently, I may have underestimated how far that impact goes.
“We are definitely getting phone calls pretty regularly from large systems who are rethinking whether they want to work with a for-profit psych hospital operator. … That’s definitely a trend at this point,” Dr. Harsh Trivedi, president and CEO of the nonprofit behavioral health provider Sheppard Pratt, told me at the end of 2024. “You don’t want to be on that board having to explain why this thing that they’re reading about in The Times is the type of entity that you have now made a new deal with.”
More recently, I’ve heard from professionals in the deal space that the fear of becoming embroiled in the next behavioral health scandal contributes to the lengthier and more thorough due diligence process for buyers we’ve seen pop up in the last few deals. Separate from inheriting a pending court case, which is obvious and clearly problematic, many buyers question the quality and character of the front-line employees that will come along with the deal. As an extension of that, there are more and more questions from buyers about care quality and safety.
Ironically, the increasingly for-profit nature of and the proliferation of private equity in the industry may spur operators to address the quality, safety and staffing concerns that plague the industry.
Buyers and sellers have financial incentives to ensure care quality. On the buyer’s side, ensuring that the assets they are getting are of respectable quality and/or they make investments to reach that level of quality is also a financial consideration. At the end of a hold period, the buyer must convince other investors that their assets are high quality. Plus, whatever investments are made to prevent hiring potentially abusive staff or ensure that the right compliance systems are in place likely pale in comparison to the legal costs that might come from litigation over safety or care quality—and that doesn’t even consider what would happen if a trial goes against that provider.
What’s more, Acaida Healthcare maintains that it still has a robust pipeline of hospital partners. During its third-quarter earnings call, the company said that it had 21 joint venture partnerships for 22 hospitals. It will be telling to learn what those figures look like after the company’s year-end earnings call on Feb. 27.
The big difference between nonprofit and for-profit behavioral health organizations
There aren’t that many difference between non-profits and for-profits. Apart from the legal obligations around taxes and the ability to take money and give nothing in return, nonprofit and for-profit organizations are subject to the same economic forces. A common nonprofit sector cliché neatly summarizes this: “No margin, no mission.” The point here is that nonprofits need to be profitable if they want to actually do the societal good they set out to address.
Similar to their for-profit peers, some of the larger nonprofit behavioral health providers have publicly funded debt, called bonds, that are bought and sold as commodities on open, digital markets. It’s not exactly the same as Wall Street equities trading. But similar principles apply. These behavioral health companies are obligated and, therefore, motivated to generate financial returns to not default on these bonds.
Plus, a lot of the worries about the impacts of private equity in behavioral health are clearly overblown, at least the potential scale of those impacts. Research by Oregon Health & Science University (OHSU), the University of Pennsylvania and Yale University found that “6.2% of all mental health facilities” and “7.1% of all SUD facilities” in the U.S. were owned by private equity. According to a large federal data review, about 19% of all mental health facilities were “private, for-profit” enterprises. In comparison, that number totaled 42.5% for addiction treatment facilities and 23% for “combined substance use and mental health facilities.”
The biggest and most essential difference between nonprofits and for-profits to me isn’t so much about their nature but about what their nature makes it easier to do. The nonprofit behavioral health operator sector is significantly more committed to addressing the most challenging and urgent care issues than the for-profit sector. The nonprofit sector’s attachment to concepts like community and a virtuous mission leads them to take on initiatives that aren’t obviously profitable but are nonetheless desperately needed. And without investors to keep happy, the cash that falls to the proverbial bottom line can be — is expected to be to some degree — plowed back into the enterprise, enabling space for greater innovation. A small example of this is the certified community behavioral health (CCBHC) model, the exclusive purview of the nonprofit world.
So, with that in mind, it makes sense that hospital operators might want someone who intuitively understands their objectives. American Hospital Association data shows that 76% of community hospitals are nonprofits or government-run.
Doing good is the only solution
The types of behavioral health partners that hospital systems are more or less interested in partnering with isn’t the issue itself we should concern ourselves with. It is a symptom of a deeper problem — the waning trust of the public in institutions, especially those most intimately tied to America’s capitalist economy.
I would maintain that public sentiments measured by polls give us a good idea of where we are on this topic. In July 2024, Gallup released polling data that showed that banks and “big business” are among the institutions in which Americans have the least confidence. For banks, only 27% of respondents maintained “quite a lot” or “a great deal” of confidence, while the same sentiments for “big business” were only held by 16%.
That said, “small business” had the highest levels of confidence of all institutions considered in the Gallup poll: 68% of respondents had quite a lot of or a great deal of confidence. The Gallup report doesn’t explore why this is.
However, it is clear that general confidence in big and powerful entities that may feel distant from most people’s lives is much less than in more familiar operators. Along those lines, the military is the second most popular institution assessed by the poll.
I would posit that many people see the military as somehow different than other large institutions. The difference could be attributed to familiarity and a resultant well of general goodwill. Everyone knows a veteran or an active-duty service member through their various social circles. There are about 1.3 million active duty service members and 18.1 million veterans in the U.S. Small businesses are similarly close to home. This familiarity may be leading people to see the two as innately virtuous and accumulating a meaningful degree of confidence and trust over the years. And that is really the only way to win confidence from anyone about anything — to do good things and consistently do them over time.
Translating this into BH biz speak, the solution to addressing the industry’s shortcomings or branding challenges is to deliver on what the industry promises. This solution is not about marketing better. I would argue looking for ways to handwave away problems is even more detrimental in the long run.
All of this needs to be about making a real and discernible difference for the several constituencies of the behavioral health industry, starting with and ending with patients. Something else we can learn from the industry’s and its leaders’ misdeeds is that patients’ experiences profoundly impact the industry. The negative news I listed above has had all kinds of adverse ripple effects on the industry. The only meaningful way to combat that is to provide such impactful care that comparable ripple effects flow through the industry.
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