At our recent M&A webinar, Behavioral Health Business spoke to Dexter Braff President The Braff Group, Matt Pettit Founding Partner Seven Hills Capital, and Kathleen Stengel CEO NeurAbilities to learn the current and future of the M&A market.
This transcript has been edited for clarity.
[00:00:00] John Yedinak: Hello everyone, just want to say thank you guys for joining us for the behavioral health deal trends and outlook for 2022 webinars. So I’m John Yedinak with behavioral health business, and I just want to thank Dexter and the Braff group for sponsoring this webinar. We’re looking forward to a great collaborative discussion.
[00:00:14] So we welcome questions during the session. So if you have any questions, please go to the questions box on the right hand, your screen for the go-to webinar panel, and we’ll get in as many as we can. I’ll be making sure to attack those as they come in. So, today we’re joined by three amazing speakers and great human beings.
[00:00:29] So, first of all, I just want to introduce Kathleen Stengel, she’s the CEO of neuro abilities. Matt Pettit, the founding partner of Seven Hills Capital, as well as Dexter Braff, the president of the Braff group. So Dexter, I’m going to pass it off to you. Who’s going to give us a little bit of a presentation and then we’ll dive into the discussion and go from there.
[00:00:45] Thanks Dexter.
[00:00:45] Dexter Braff: Thanks John, I appreciate that. So, good morning. Good afternoon. What we want to do is just spend a couple of minutes just doing a broad survey of what the merger and acquisition climate is for behavioral health care. we developed this, this thing called a heat map. I need to just take a few moments to explain it to you. It’s it’s, it’s a way that we are able to look at a space and look at two variables at the same time, one variable on the vertical axis, is the number of deals that have been completed in a, in a space over a five-year period of time on the horizontal axis axis is the slope of the trend line. So if you remember your middle school, somebody may remember the formula Y equals MX plus B a and M is the slope of the line, and essentially the slope of the line in a growing market, that slope is a positive slope and it’s moving upwards in a declining market, that would be a negative slope and it would be a negative territory. So the way that this map looks like, is the further you are to the upper right hand corner of a heat map. The more attractive that space is both in terms of the volume of transactions completed over that five-year period of time and the five-year trend, the growth trend over that period of time. So we can look at two variables at the same time. So this looks at healthcare services overall.
[00:02:16] And what you can see is that behavioral health is far and away the most attractive segment from a mergers and acquisition standpoint. Compared to any of the other healthcare service segments that we track, home health and hospice has put out a lot of big numbers as well, and is also growing at a nice pace. But behavioral health is quite a bit further off and both home health and behavioral health have quite a big separation, from the other three major areas, which are home medical equipment for us, healthcare staffing and pharmacy services, you will note pharmacy services is actually one in negative territory. It’s on the negative side of that slope, which means that that particular side of the market is trending downward.
[00:03:00] So behavioral health is way out there, in terms of, where it is within relationship to the other healthcare service areas. So, if we look at the actual numbers, what we’ve done here is, is shown all of the behavioral health care deals, and we break it up into acquired brain injury, at risk youth, intellectual and developmental disabilities, autism services, mental health and substance use disorder. And this is the last decade. And what you can see was that we were in a pretty steady growth rate since around 2014 to 2020, but in 2021, we saw a very, very big jump in activity particularly I would, point out on the bottom two rows.
[00:03:44] If you take a look at mental health and substance use disorder, we went from 56 deals to 81 deals between 2020 and 2021 and 55 and 82 between 2020 and 2021 in substance use disorder. The other big jump was in IDD. So what we see is that the behavioral health model really blew up in 2021. And as many of you probably heard in one format or another, that this is due to, largely due to the expectations of the increase in utilization and funding that occurred as a result of COVID.
[00:04:21] So the sector was growing nicely. But with COVID added on and the expectations that people are going to need access to more services and the increased funding, a lot of buyers rushed into the space and jump-started us from 20 to 21. So 2021, as you can see, or record-breaking year is about 30%. The previous record that was set in 2020, by the way, this is all proprietary data collected by the braff group.
[00:04:51] If somebody that actually works almost full-time for us collecting this data, now, if we do a heat map and then break it out, just looking at behavioral health and breaking out the individual segment, what you can see is that mental health has really jumped up. so the front of the pack, not quite as many deals done over the five-year period of time.
[00:05:14] If you look on the mental health that red dot and follow it to the left, you’re looking at about 250 transactions done over that five-year period of time versus substance use disorder, a little bit more than 300 transactions, but the rate of growth, in terms of transaction activity in mental health is far and away, the area that is getting the most amount of attention, that is also as a function of COVID and the focus right now in mental health is the outpatient clinics. th that area has taken a big job as buyers see outpatient, mental health as a,destination for people needing to access services, under a much more, stressful environment as, as a result
[00:05:58] what I want to do in the last slide is take the area where we’ve done the most amount of transactions that way the second substance use disorder, and do a heat map on that. So what we’ve done here is we’ve broken out of substance use disorder. And so if you think about these, these three slides, the first one, we were looking at health care services, and we saw that behavioral health was the most significant in the next heat map, we looked at behavioral health and saw that mental health was the greatest growth. Now what we’re doing is taking a look at substance use disorder and looking at where the activity is there. And here we have two very interesting things. What I point out to you is the red dot, which is residential substance use disorder and these are companies that focus on the value to midbrain size and market. So these are not your passengers, Malibu. These are mostly private pay for people that can’t quite afford those luxury programs. Also a lot of medical reimbursed services. The growth in that area has been substantial as we can see that farthest off to the right, contrast that to the blue dot all going on the left, which shows residential substance use disorder. High-end and that’s very much a negative territory, this, these two, but these two dots would have been reversed. If we look at. 10 years ago to five years ago, this is the last five years.
[00:07:31] Dexter Braff: If we pushed it another five years back, these dots would have been reversed. And then the other thing to point out is that medication assisted treatment has a part of the most number of transactions over that period of time. It’s also posting a fair amount of growth, and that is largely because NAT is a philosophy notwithstanding and NAT is seen as the least costly program with the greatest amount of predictable outcome.
[00:08:00] So John, that’s my kind of quick overview of behavioral health checking all the way down into the various sole segments and then into the greatest amount of detail in substance uses disorder.
[00:08:11] John Yedinak: Perfect. Fantastic. Thank you, Dexter. That was awesome. So I’d love to kind of dive right in here. So, I guess looking at that data, you know, obviously 2021 was a record year for M&A transactions in space.
[00:08:22] I guess my big question to all the panelists is, have we peaked? It seems like it keeps going up. So Kathleen, I’d love to start with you and kind of get your take on that. We peaked yet?
[00:08:30] Kathleen Stengel: I think in certain areas you’re going to see stagnant growth. like Dexter said with the autism services. I think that that’s going to continue the way that it is. There’s not that much out there in terms of, you know, platforms they’re continuing to be splintered. So I think that’s kind of staying stagnant, values the same. Dexter could argue with me on that, but stagnant growth. I do see the medication assisted treatment, increasing demand is increasing, legislation is funding a lot of these programs and it looks like it’s going to be sustained over time. So I don’t see mental health first of all, the demands not going away. and now we have avenues by which we can fund it. I see it growing exponentially over time.
[00:09:11] John Yedinak: Matt I’d love for you to kind of jump in and give your thoughts here.
[00:09:14] Matt Pettit: Yeah, no, I think we think it grows. I think for 2022, our philosophy is, and we have a business called the diverse care group that provides pretty much everything. That Dexter listed on his behavioral house segment map besides substance abuse and we’ve already closed one add-on acquisition, we have three more under LOI that are either an IDD or skilled services, kind of like an AB, like we, there’s smaller opportunities. And we think that pipeline, especially with the way COVID is impacted, the challenges to operate a smaller business right now will continue to go, and grow.
[00:09:46] I think there will be a lag in the actionable platform opportunities, across the board for 2022 and not just in behavioral. But holistically, but as it relates here, I think the substance abuse piece is something that we’re actively looking to invest in. we have been for years, we’re trying to figure out the best place to, to jump into that post COVID what the new, what the new world looks like and how that will shape up over the next few months, which I think to, to Kathleen’s point leads to growth probably in 2023.
[00:10:16] But I see even in some sector, a slower 2022, platform environment.
[00:10:24] Dexter Braff: I think I agree a hundred percent with what Matt and Kathleen has said, you, we might see a drop-off in the number of deals in aggregate in 2022, because one of the factors that contributed to the surge was not only the issues around COVID and those were, they were significant.
[00:10:44] And I would argue they’re the most, most significant. But you also had the element of a lot of people being concerned about capital gains taxes, rising retroactive to the beginning of 2022. So some deals that might have been done in [00:11:00] 2022, we’re probably done in 2021. We saw similar type things happen between 2012 and 2013.
[00:11:09] When the Bush tax cuts were scheduled. So we saw a surge of deals in 2012 and a slight drop off in 2013. But I think no matter what behavioral health was on an upswing, it’s going to stay on an upswing. The upswing may be a little bit down from where it was in 2022, but if you draw out that trend line, it’s still going to look like 40 degrees.
[00:11:35] Matt Pettit: Just to add on that. I mean, I think a lot of it is just being where we are on the cap or deployment cycle for a lot of, for a lot of funds for a lot of vehicles. I mean, as you guys all know, there’s a big trend to go in towards these continuation funds and holding stuff for longer. And I think that’s only going to help behavioral health continue to rise.
[00:11:56] And I, and I would argue that at the end of last year, there was an artificial push to buy. it was seven Hills, did it because we’re, we’re maybe a little more sensitive on, some of those dynamics than others are, but we saw things traded prices that could be justified depending on how you, how you want to think about it, but also, set them up for a case of probably longer or period and a lot of buying builds and I think that’s going to drive deal volumes next five or six years.
[00:12:26] John Yedinak: Now, one of the things you had said in your comments is what the new normal looks like. What, what do you guys think the new normal looks like for behavioral health going forward?
[00:12:34] Matt Pettit: You know, I think it depends on what sub-sectors and I mean, for Versa Care, a lot of our businesses are going into people’s houses for IDD treatment versus residential facilities.
[00:12:44] And thank you again for Dexter, for getting us started with that partnership three years ago. Or no four years ago now. and we have, you know, some homes, some transportation, some pro to a whole variety of services. And, John, if so, state by state, when we go up to Tallahassee, Florida, they’re telling us they want us to shift to, to more day programs or in Michigan, they’re telling you.
[00:13:06] They want to get everybody in Mora home-based, waiver services. And then Tennessee is different from Kentucky, even though they share a shared border for OTPT and ABA. so I think it’s going to be much more of a local market of making decisions on a local level and a payer level, which is one of the reasons we want to grow kind of geographically, because we do think from a business investing standards.
[00:13:29] We need to diversify our payer mix and our service mix, because however it ends up being, it’s going to be local and based on communities, not like a big national program.
[00:13:39] John Yedinak: Kathleen, what about you? What does the new normal look like for you?
[00:13:42] Kathleen Stengel: Well, I couldn’t agree more with Matt. I think, you know, staying close to home is going to be the key here in knowing each of the markets.
[00:13:48] I think, for us, you know, I’m an operator. So, you know, operating the business, the new normal for me is we have to continue to be innovative in how we deliver services, and diversification of the modality with which we deliver services. We’ve had to execute telehealth. We’ve had to execute different ways to, you know, go around and capture the revenue and that’s not going away. You can’t put the telehealth genie back in the bottle. So we’re going to have to continue to be innovative, you know, forthcoming work with recruiting people, people are liking the work from home and our business is all about people living services. So we have to move with where that model is going as well from a human resource standpoint.
[00:14:26] Dexter Braff: Yeah. Yeah. One of the things John that we see is, has a market consultant and those consolidation plans begin to mature a little bit, and we’re still in the earlier stages of behavioral, but we’re now eight or nine, 10 years into it. It’s very, very common to see the acquisition strategies begin to become a little bit more diversified.
[00:14:51] We begin to see buyers looking at things, not quite the cookie cutter that they started with. Plus you have an increased focus on looking at taking care of. Patients not based on an individual diagnosis as a population in general. And so Matt’s company is doing what we’re seeing. A lot of other companies are doing where the lines between autism at risk youth.
[00:15:23] Other outpatient type programs that are targeted to young people, mental health. We’re starting to see the lines between those blurred a little bit. As people say, we want to be able to handle the behavioral health needs of the large population base and so we’re, we’re beginning to see. People expanding on what traditionally on the autism space was ABA.
[00:15:49] And now we’re seeing physical therapy and speech therapy and in Kathleen’s, situation and John, if you don’t mind, if I tee it up for Kathleen, but she, she’s doing a unique thing where she’s building a medical model, which we think is a really interesting, approach and probably one that,should take on, some, some interest.
[00:16:09] John Yedinak: Kathleen, what can you dig into that for us? And give us a little bit of a better overview and what you’re doing there with the model?
[00:16:14] Kathleen Stengel: Sure. Yes. You know, we had a thesis that, you know, was diagnosis agnostic. I know, you know, from an investor standpoint. They like to have their very much, okay. This is autism.
[00:16:25] That’s what it is. But autism falls under the behavioral health paradigm and autism is not one thing. Autism is many different things and it’s comorbid with a lot of different other disorders and payers recognize that they’re there understanding that it’s not just one avenue of treatment. It’s one plus one plus one plus one exponentially.
[00:16:43] And cross-disciplinary. So when we started this practice, it was starting. a neurologist who is dual-certified as a psychiatrist, you know, neurology and psychiatry go hand in hand. And that thesis is that it is in fact, the medical intervention for some of the population we work with, which is intellectual disabilities, psychiatric disorders of adolescence, as well as autism.
[00:17:04] But we are diagnosis agnostic. We take it front to back. From diagnosis all the way through precise treatment. And we think that that’s what the payers are looking for and that’s what I mean by innovative. It’s not simply siloed into one particular treatment modality yet, but we have that treatment modality as well as speech, as well as OT as well as 30% of my population of autism has epilepsy.
[00:17:27] So we have to have the neurological aspect in there as well. So we think that that’s really the future of care for this.
[00:17:33] John Yedinak: Matt from a private equity standpoint. How do you guys look at that kind of model? Like what were, I don’t know, any insights you can provide
[00:17:39] Matt Pettit: Yeah, I mean similar, I mean, we’re probably, I should clarify.
[00:17:45] I mean, I invested in a very large GP for years. I got the operating bug and tried to follow in Kathleen’s footsteps and I wasn’t very good at it. So, I mean, I served at an opera for a little while and then we decided to go back. Partner with operators who want to build businesses. So we’re probably more aligned with that with Kathleen.
[00:18:03] And when I do kind of up market calls I know Dextra does a lot too with their friends or they’re really big GPS trying to put a hundred to $200 million to work in transactions. I always tell them like, guys, this is not a cookie cutter industry. This is an industry where everyone has unique needs indeed.
[00:18:22] you know, I have. It was afflicted and you know, his needs are different than you might be going to therapy after. Right? You never know. And unfortunately from an investment standpoint, people want a linear thing they can think through. They love your team maps and this industry is really one size that does not fit all.
[00:18:41] Matt Pettit: And I think that some of the bigger platforms who have had some growing pains are realizing that the hard way.
[00:18:48] Dexter Braff: I think one of the challenges, John, is that Matt can speak this and he kind of intimated when he was talking about these continuations. Is that the private equity groups are generally looking at a three to seven year investment cycle.
[00:19:03] And a lot of the things that Kathleen is doing, and a lot of places where the market is moving, it’s moving slowly and so if you have a short investment horizon and three to five years is a relatively short investment horizon, it can be risky to be far out in front of the curve. So it’s a lot for those people for a longer term, it’s a, it’s a safer play to be moving into these other areas. So maybe Matt and I only go one or two degrees of separation away from his core business, but Kathleen could go through the four degrees of separation because of the pressures or lack thereof, we’re having to monetize something, over the, over a period of time.
[00:19:46] Matt Pettit: Yeah. And we’re lucky for us that we don’t have that pressure with versa care behavioral business, the loop, the CEO, and I are the two shareholders. So we have a 10 year Plan. I mean, the bigger issue Dexter has is how long Lauren wants to keep doing it. Right and every day, every time we talk quarterly, but I’m like, Lauren, what’s the timeline.
[00:20:09] And she keeps saying 10 years, so we’re four years in. And so that means we’re, we’re looking at a 14 year investment and I, I love that. Right. Because it’s a great way to take risks on providing services to provide better outcomes which if I was in my former life and I had a three to five years and then me to buy a company the first year, figuring out what it is, and he got three years to get value and sell on the fifth year, it’s really hard to switch a service model there’s just too much risk into the equation.
[00:20:37] Dexter Braff: It’s one of the reasons why we are beginning to focus more on working with financial buyers side with family offices versus traditional private equity family offices. For those of you who don’t know, our investment arms are basically wealthy families so have got a ton of money. They hire a couple of folks to work with that money invested as a private equity group would, but the difference is that they’re usually not looking for a to try and build and sell and so they’re more long-term holders and long-term holders or for better to be investing in something that’s a little bit more innovative and is in a position of change than someone who is in a little bit of a shorter window of time.
[00:21:23] So it is an interesting element that factors into not only who’s buying and what they’re buying, but what the strategy is in terms of timing.
[00:21:34] John Yedinak: Kathleen. How do you balance some of this, in terms of like, you know, doing these things, like the medical model and taking these risks and moving towards that kind of stuff with like, what’s running the business right now, I guess, how do you as an operator kind of balance those, these newer things that you’re trying to see how.
[00:21:47] Kathleen Stengel: Well, medical physicians know what they’re doing, thankfully, so I don’t have to balance any of that. And people will come to see the doctors. So at the end of the day, if I build it, they will come for my medical physician. So that’s relatively easy as long as you are an electronic platform and the nuances are addressed, you get contracts very easily, for the medical facility building on the new service lines.
[00:22:07] We’ve done it in a structured way where we get it. Where we got funding first, we balanced out the geographic areas of where we had our resources and then flushed out from there. And then each center would add on additional, you know, SLP, OT, PT, as well as marriage and family therapies. Those are the “innovative”, but once you have the core business of the therapy arm, let’s call it.
[00:22:30] You can then intersperse, without running a risk of losing much funding because you will get it covered. So it’s more of a per diem on for when we insert the other service lines.
[00:22:41] John Yedinak: Interesting. Okay. So since we’ve been talking about, you know, more medical models and some innovative things, I’d love to pick your guys, talk a little bit about value based care.
[00:22:49] So we’ve obviously seen this as a huge trend and people are clearly exploring it in the behavioral health space, but I know there are some people that kind of smirk and say, it’s not going to work or it’s not working. Right. So I’d love to kind of kick off extra. I know during our kickoff call you kind of, you talked a little bit about that.
[00:23:05] I’d love to hear what you’re seeing in that, in that kind of market. And I guess how you’re seeing. No evaluations and things like that as well,
[00:23:12] Dexter Braff: Well, Matt and I both were at a conference this past week in Chicago sponsored by McGuireWoods and not undoubtedly value-based, plans came up.
[00:23:24] Now we’re in an investor room. Okay. The consensus is there’s no question that value based plans and purchasing is something that is evolving and has the right financial incentives in place to make it work over the long-term. Now that people are moving to more population health based models, there is a, the focus is now on providing the right level of care in the right setting, and, and trying to make sure that that patient doesn’t have to constantly get recycled into the system. However, the big, however, is what’s the timeframe and the percentage of reimbursement that is coming through value-based care is still relatively small. I heard some numbers. I don’t recall if I got this right, but I thought I heard something around 15% of reimbursement is coming from value based care.
[00:24:19] Dexter Braff: And that’s a lot compared to where it was, but it’s still a small fraction of the total amount of reimbursement that’s coming out.
[00:24:26] Matt Pettit: Yeah. I mean, not to talk against myself on the first mover advantage, basically having a longer hold period, but I think we’re kind of in a wait and see mode and we want to just, especially in our behavioral health business where, you know, sometimes if you know, one and then as they’re evaluating, especially up in Michigan, different MTOs like how that’s going to work. I mean, we’re kind of taking the approach of getting all the data ready, hopefully figuring out a way to do it. but we’re not willing to go out on a limb and make a proposal yet until we know what kind of what the constituents want and I think to your point, I heard 50% on the high end, I think it’s if the investor community is guilty of anything. It’s the overuse of buzzwords and unfortunate. I think this is one of them right now.
[00:25:11] Dexter Braff: I think one of the things though, Matt, if I can just jump in, is that, is that for if we represented a client that was doing traditional work, but that had a pilot program where they had a contractual relationship with an insurance company for a small population that they were working for.
[00:25:29] Oh, we would love that because they are living laboratory of those types of programs, bomb somebody that’s in this, and I’m not necessarily looking to sell the next one or two or three years. I would definitely be trying to get into a pilot program where I’m not putting my entire business at risk, but where I’m using it to learn and I can afford to have a failure, but that failure provides me with that.
[00:25:59] Matt Pettit: We looked at one, one state specifically for one kind of diagnosis with a Medicaid managed plan. And actually that you can guess who it is because that Medicaid managed plan sold to another Medicaid administrator. So now it’s a different administrator. We haven’t really restarted these conversations, but to your point to Dexter from a, from a valuation standpoint, I think anyone who’s purchasing or investing in a business would put a lot of credit or a lot of value behind just saying you did it. I mean, that would be the biggest selling point in an investment committee, which is they were piloting value based care.
[00:26:38] John Yedinak: Kathleen, What about you? How are you approaching it?
[00:26:39] Kathleen Stengel: Right now, it’s, it’s, it’s very difficult to approach value based care, the same way that we did in the medical domain. You know, we’re not measuring adverse events, you know, and behavior health. There’s not one outcome. There’s not one similar type of patient, at least in autism. You know, autism is not one thing. So how do you then measure value for a population that you. Put in a homogeneous group. So I do think it’s going to be a long play by the time we get to those measures. But I agree with Matt wholeheartedly, we’re collecting the measures, we’re staging it and we are going to be the ones that define what our value is to the insurance companies.
[00:27:18] And we have pushed forward with pilots. and we think that that is kind of the next way to go working with the payer to define these out of. I don’t want to have the payer define and prescribe what it is that I’m doing. So I’d rather work with them and say, here’s what I have. Here’s what I’m willing to collect and, and this is how our movement towards outcomes, as opposed to saying, I have this outcome and pay me for those. So we want to mitigate the risk, but also be able to work with the payer long-term for the populations that we serve, that we ourselves are defining.
[00:27:50] John Yedinak: And just a quick plug for us. We do have a value-based care conference coming up. We’re super excited about it, so Dexter will be there. Kathleen might be joining us as well. So I, I know we do have some questions here that I’d love to, so I’d love to kind of jump around a little bit. We got a great kick off question. for the panel. So it starts off as what are the trends that panels are seeing with tele-health and how does effective tele-health implementation influence valuation? So Dexter, I’d love to kind of get your content earlier insights there in terms of the clients that you’re working with. And then we’ll kind of go around here.
[00:28:21] Dexter Braff: Yeah. telehealth has obviously been very, very big. COVID really jumped, started that, as, a lot of payers, including government relaxed their guidelines on what qualifies for a tele-visit, and how that gets reimbursement reimbursed.
[00:28:35] I think the future of, of, of all of the, all of healthcare and then a lot of behavioral health is going to be tapping into tele-health services as part of an overall. As a tele-health platform alone, there’s definitely a business there. There’s no question, but there’s a big challenge in getting caregivers and getting providers there just aren’t anywhere near the number of providers that are available out there to run effective tele-health a services business who is theoretically, you want to be able to treat every patient that calls in, you know, 24-7, and you need a lot of providers to be able to, to satisfy that and their shortage of providers is just dramatic. SAMHSA came up with a study that said that is roughly, and I don’t, their definitions might be a little bit, Not clear, but they have to make there’s about 700 to 800,000 behavioral health workers in the United States.
[00:29:31] Dexter Braff: And the need is north of 5 million, for where the industry is headed and so you’re looking at so much of a shortfall and it’s just difficult to be able to deploy some of these products and services, but tele-health is definitely here to stay, but I think that it’s, I think it’s going to be an element of people service areas and I think they’re going to be some folks are going to focus on it exclusively, and those are two very different business model.
[00:29:59] Kathleen Stengel: I think it’s going to be long-term hybrid models. So there’s going to be combinations of telehealth services as well as in-person visits. But I agree with Dexter, it’s always about capacity. You know, an hour of my time is still an hour of my time, whether I’m in front of the patient or I’m doing it, you know, remotely and for tele-health purely, it becomes difficult to do some of the other service provisions that you will be diagnosing for AKA and autism. It’s very difficult to do the tech services via telehealth. And, that’s because you have to be interacting with the patient. So I don’t see it sustaining the downstream revenue. but I do see it being a hybrid model of diagnostics that can happen in one sense, but I don’t see it as a huge growth, for ourselves and the business I’m in.
[00:30:45] Matt Pettit: I, echo exactly what Kathleen, just, an indexer as well. I think we were all seeing it the same way. The hybrid models, the way to go with the capacity constraints. You’re going to limit everything. Not, not just in person, not just tell how both.
[00:31:00] John Yedinak: Okay. So you guys are talking about, you know, the staffing and hiring people. I guess that’s something that we continue to hear in terms of how we do. This isn’t an easy problem to fix. So I guess, how do you guys actually see this getting resolved? Because it’s not something that happens. Well, I guess Kathleen is from an operator perspective. What are you guys doing? And I guess, how do you, when you start to kind of chip away all the time and work, what are you guys doing?
[00:31:28] Kathleen Stengel: Well, we have to be the best place to work. Number one, you know, and part of being the best place to work is to be focused on every employee, specifically clinicians who are frontline staff all the way through, that’s one aspect, but the other aspect is we have to make our clinicians. So our clinicians are under supervision. We work with practicum students. We’re reimbursing for tuition. You have to be an organization that thinks first, what are my services? Take care of those, make sure the quality is good and then develop them. Otherwise we won’t be able to sustain it, but we are always going to be in this problem where we have too much demand and not enough supply. So.
[00:32:06] John Yedinak: Now, what about you guys with your operation?
[00:32:10] Matt Pettit: I mean similar, we’re now, our hours are, and our visits are up ahead of COVID levels across our portfolio of brands but we’re working, our margins are right. That’s a function of the increased cost of that system, but I think we’re trying to be the best place to work, which is not an easy thing to do. And everybody else is trying to do the same thing but I actually, you know, all on this one, you have the microphone of Dexter because he answered a similar question in a panel. I listened to him last week in a somewhat different industry, but I, that his, his takeaways on it we’re really interesting,
[00:32:44] Dexter Braff: Which takeaways were those Matt?
[00:32:47] Matt Pettit: I wrote your analogy, about the travel nurse, making five times your regular nurse, and I’ve used it in three meetings this week.
[00:32:55] Dexter Braff: It’s really a challenge. You know, when COVID started the after staffing issue has been an issue for many years and the gap between the things that are opening and positions that are being filled has been increasing steadily over the last 10 years. COVID accelerated that dramatically so we realize that. We wanted to be in the healthcare staffing market. So we’ve been pounding that sector hard over the last 18 months and the numbers are just extraordinary. As I mentioned, Matt referred to there are nurses now on the west coast that are filling travel positions and, literally being paid $5,000 a week.
[00:33:36] Dexter Braff: And they’re working alongside a staff nurse, that’s making a hundred and twenty-five thousand dollars a year or a hundred thousand dollars a year and so where you wind up happening is you have staff nurses saying, why am I doing this? I should quit my job and become a traveler. and, and maybe I’ll get lucky and travel to my same job, you know, and wind up getting two or three times the amount they get paid.
[00:33:59] But I think there, so there’s no, there is no easy. This is not going to be fixed in a short period of time. So I think Kathleen and Matt are, I think if I’m a provider I’m doing exactly what they’re doing is, I’m doing everything I can to create an environment that people want to work for me. That’s not about salary and, and the one good thing about there’s a lot of good things about health care, but people that are in the healthcare services are caregivers, you know, most of them did not get into it to, to make it wants to make money, but that wasn’t their primary objective. So if you can appeal to the clinical excellence that your company provides and you’re operating a competitive salary. So I think I would like to position myself at the 75th percentile of salary, not at a hundred percent off because anybody that comes to you at the hundredth percentile is only going to be with you until the next guy gives him/her a raise
[00:34:57] So I, you know, it’s hard. I don’t envy you guys. but, but, it is something that’s going to be with us for a long, long time.
[00:35:07] John Yedinak: Kathleen, when you’re bringing people up, how I guess, is retention of those people that is such a huge issue for you?. If you’re going to invest the time to get them license, to do all this kind of stuff, that is retention, just a huge, huge strategy for you guys going forward?
[00:35:18] Kathleen Stengel: Absolutely. You know, recruitment retention is the name of the game. I mean, that’s all I think about at night when I go to sleep and when I wake up, you know, make sure to have the people and make sure they stay.
[00:35:33] Dexter Braff: Employee retention is one of our, we look at about 13, 14 variables when we do valuations of our clients. Employee retention is a very significant one in that, which is it’s always been there, but it’s more important now than it was before.
[00:35:51] Matt Pettit: When we looked at the partnership it helped us get to start Versa care. The biggest thing that jumped out off the page and why we went to the initial meeting was their caregiver retention was unbelievable. And when we saw that we were like, this management team is doing something right. And it was a leading indicator. It’s an awesome management team, but they had figured that out.
[00:36:12] Matt Pettit: It really just has gone through the whole business.
[00:36:16] John Yedinak: So what does good retention look like based on the clients that you guys are working with?
[00:36:21] Dexter Braff: That’s a tough one because everybody defines it very differently but generally speaking, you know, the retention rate in healthcare service providers is pretty low. It’s around 25%.
[00:36:36] I’m sorry. The turnover rate is around 25%. So anything that’s less than that, if you can retain your, your folks come more than a year, you’re doing well. You’re doing really well, but there isn’t comparative data. That’s out there to be able to evaluate it. So when we look at, we just simply say, what’s the average tenure of your people look at that.
[00:37:01] And if that number looks like a good number of what looks like a good number, again, if I’m over a year, I mean, I’m holding onto people, but I’d be curious what Kathleen, how Kathleen sees that because she’s an actual provider.
[00:37:16] Kathleen Stengel: I will say that, just so Matt’s clear, we are the best place to work. Matt’s second best. We do look at turnover. I’m sorry, Matt. I had to put a plugin. We do look at turnover. we see that it’s actually six months Dexter. six months is our threshold. When they make it to the six, six month mark, they tend to stay with us for a longer period of time.
[00:37:37] And we do provide tenure as part of our main KPIs, even to our funders. That’s a big deal. So having people, you know, are, we are lower, you know, “unskilled staff”, if they stay six months, they’re staying with me for three years. If they don’t make it the six months, they weren’t gonna make it anyway.
[00:37:54] So anything over a year, I agree with you. Dexter’s pretty upstanding.
[00:38:02] Matt Pettit: Spot on to six months is magic number for us all right.
[00:38:08] John Yedinak: So we’re starting to get more questions coming in. you actually. So we have a question here, there’s so much stuff, moving towards tracking outcomes and value based care and people starting to make those investments, I guess what technology investments, this is for the operators, but what investments in technology are you guys really focusing on right Now. How to prepare for that shift?.
[00:38:34] Dexter Braff: I think Kathleen and Matt might be better suited for this. I will tell you that very, very, very, very, very, very few providers have anything more sophisticated than an electronic medical record and a lot of them don’t even have that or if they have it, they’re not utilizing all of the capacity.
[00:38:53] It’s hard to run a business on a day-to-day basis. Moreover, to start to deploy technology, that’s going to help you be able to be able to do value based care. That’s the kind of stuff where you start having to deal with, evaluating, partnerships and, unit costs, services, and outcomes, and integrating that.
[00:39:13] And I’m not entirely sure that there is Great software out there yet available to the book provider to be able to tap into in order to after that information. But I’m going to let Kathleen and Matt.
[00:39:29] Matt Pettit: I’ll go first cause Kathleen will have more to say on this, but I’m entirely sure there’s not a great one-stop solution. So we’ve put in, in the past 12 months and new, a new billing kind of interface, a new ERP system, as well as hired a former Pricewaterhouse transaction advisory FTE into the business, who does nothing but crunch data, to get ready for all the things that we’re going to have to tap to be ready for. With more software comes more frustrations and we’ve at the board level have had a lot of conversations of why are you going to, did we buy this?
[00:40:12] Kathleen Stengel: This is the bane of my existence putting in new technology, we are using all EMR software. That’s the first thing that we did, just because I’ve worked in Medicaid so long that I don’t want to go to jail for anybody with Medicaid fraud. So part of that comes with the investment of tablets and ensuring the training on the tablets and making sure from front to back things are okay and solid.
[00:40:35] The key and you’ll hear me talk about this all the time related to value based care. The key is garbage in garbage out. You need to standardize your methods. So methods by which we garner the data are super important. How does the clinician put the data in? What type of clinical pathways do you have? That’s one level and how are we billing?
[00:40:54] What type of services do we provide? If you’re collecting all those data, they should be in an EMR, but the key is to have solid standard operating procedures to garner that data. Otherwise, it’s going to be very, very difficult to analyze long-term so that’s why you’ll hear me preach about methods. I’m a scientist by trade, so I can’t help but think about it from that perspective.
[00:41:13] The technology like Dexter said, and Matt knows that there’s not one system and it’s almost to the point where you have to thread your own systems together to get everything you need going from, you know, Salesforce to an EMR, to a billing platform, to a clearing house, to a, to a, to a, there is not somebody who’s going to come magically thread that needle.
[00:41:33] Kathleen Stengel: Trust me, I’ve asked for the last 20 years, we’ve had to build it together. The best thing that we implemented was a week over week power BI that pulls everything all together. And that’s our biggest area of investment from, you know, we’re not big, like Matt, we have to actually do our own data crunching.
[00:41:51] So we pull it into a visual format and manage it that way. But there’s no. I wish I had a magic answer for this one
[00:41:57] Matt Pettit: Kathleen for the first three years of our investment, I would get a bunch of raw data and I would get my fingers ready and I would, I would do it. I mean, it’s just because like, whether Kentucky Medicaid for Michelle P waiver or, or billing, you know, Florida for an ACO waiver or going blue cross for an ABA claim.
[00:42:16] Right. All of them have different systems. Nothing communicates well, and we were finally, I was like, know, we got to this scale. We could bring in a kind of a data scientist to do all of it, but, make no, no confusion about it. Like no software is ready for all these payers. Like it’s a lot of work still.
[00:42:36] Dexter Braff: And part of the problem is that you can manage your own software, but in order to be able to really understand how you are doing? You need to access other people’s. Yeah, because your patient is part of a continuum of services and you’re trying to coordinate that and say, all right, great. I know what happened to my patient when they were right within my walls, but my value based care model might include things that are happening outside of my walls and how do I get that information
[00:43:03] Matt Pettit: More pain points from this, then we do. But like we have some folks in certain counties who we provide respite care under one waiver for, which is a low margin business. We make sure we want it to be for healthcare workers in our core. Right. But we’re also doing skilled services for them and we have to bill the same payer for the same patient through two different portals. That’s really hard to work around and it becomes a lot of friction in the business.
[00:43:37] John Yedinak: Dexter, I got a tough one or some kind of tough ones here for everybody. Always wants to talk multiples and things like that in terms of what you’re seeing in the markets. So, do the best you can with these, but I guess, I guess, so we’d love to get some range of just pure mental health kind of multiples, valuations that you’re typically seeing and I guess just payer mix, Actually, how does payer mix impact valuation going forward? If you could kind of help a little bit, he has some specific ranges I’m happy to give. I just know it’s tough. It’s anywhere from half a million to a million and EBITDA one to five and up, I guess, what are you seeing?
[00:44:13] Dexter Braff: Yeah, I mean, obviously it’s a challenging question, but, but I know people really want to know what it is. I think the first thing to understand is that over time, a service business will generally sell between four and six times earnings before interest tax depreciation, amortization, but there’s, it doesn’t have a lot of hard assets.
[00:44:30] And also generally speaking the services that are being provided or not necessarily proprietary, people are doing more or less the same things. However, people are executing very differently. There’s no question about that, but right now, valuations across the board or way of, not only because of the unique circumstances around healthcare, but also because of some of the macroeconomic issues that Matt kind of hinted at before in terms of availability of capital.
[00:44:59] So what we’re seeing is that the four to six of a couple of years ago is now more like six to eight for a decent running a business with maybe a million dollars of earnings, that is generating a fair amount of growth. It doesn’t take a lot right now to get into the double digits multiples of EBITDA.
[00:45:22] If you, if you have a company that’s growing quickly or is generating about four or $5 million worth of EBITDA, it’s very challenging the valuations overall, if you’re going to, if I’m going to give you a full range, you know, for a decent operation, you’re now kind of starting it around six times EBITDA. And, you know, you can get well into the 11, 12, 13, and higher for a, really a really select asset.
[00:45:49] I know that’s the big difference between six and 13, but the reality of it is, it depends on who that buyer is and, and, and where they are in their buying cycle. One of the challenges that buyers have, and Matt also hinted at, is that he may be willing to pay 10, 11, 12 times EBITDA for his first company, because he wants to get into the business, but he can’t keep on buying at 10, 11, and 12 times EBITDA and hope to be able to make a good return on investment because he’s now starting at what you would normally get for his growth multiple.
[00:46:29] Dexter Braff: So normally you’d be buying a five or six, get bigger and then sell it a growth multiple at 11 or 12. But if you starting at 11 or 12, They’re broke. Multiple is already not. So there’s gotta be a combination of more startups, which I think mountain Matt hinted at before. so, you know, six to eight, up to eight to 12 for the really good performers.
[00:46:54] That’s kind of where we’re at.
[00:46:56] John Yedinak: Okay. Kathleen, you’re smiling. So I’m assuming you’re really good, perfect.
[00:47:01] Kathleen Stengel: I hope so I’m not going to value myself here, but I’m smiling because of the range. The range is just very large and Dexter’s right. Not everybody expects one and there are some factors to go into that multiple to right Dexter, like manufacturers on execution.
[00:47:18] Matt Pettit: Personally think from somebody who is physically nauseous, because of some of the valuations out there, from time to time.
[00:47:24] You know, that’s why we’re focused on now. It should be a 14 year investment, right? I mean, we’re just gonna build it and do it the right way. but I think the psychology in the market as it sits today, and I think it’s, it’s going to continue. I mean, you can take rates up 250 basis points and still capital is going to be relatively cheap compared to what it was when we had massive interest rates and that the valuations didn’t feel that inflation in my mind for years. And now they’re really feeling it. And that coincides with a lot of people with a lot of cash. And you’re sitting there where people have to deploy capital. I mean, if you’re in the business of deploying capital and you just say it’s too expensive.
[00:48:08] Well, yeah. Just because you have a private equity firm doesn’t mean you don’t have clients and a lot of our pensioners and insurance funds or high net worth individuals, to people who are for deals that are really good and have great teams. I mean, they’re paying historically high multiples and we said the same thing two years ago.
[00:48:26] It hasn’t changed. I personally don’t see it changing anytime soon, no matter what happens on the macro level, the best assets with the best team, with the best stories. We’ll find a way in an efficient market to meet managers who need to deploy capital.
[00:48:41] Dexter Braff: With one thing we are always careful about is that one thing that could turn things around is if one of the high profile consolidators has something really bad happen.
[00:48:53] So if Lifestamps or Refresh Medical that do have large transactions in the mental health space, I’m not saying there’s any problem with them at all, but if they stumbled. If, if their stock took a hit because of something bad that happened, that’ll send a big chill down the back of a lot of investors.
[00:49:13] Dexter Braff: Those are the types of things that can have a very significant impact on valuation, mostly because it just gets people to stop in their tracks and they go, wait, this was supposed to be all great. But now I have a leader. Who’s stumbled. What does that mean? And so those are the things that we’re always worried about.
[00:49:34] And again, for a seller it has nothing to do with you, but it has to do with the people that are in your business. It’s one of the reasons why we tell our clients and people that are in their root for your competitors, because if your competitors are doing well in selling the high valuations, that is good for you.
[00:49:50] If they stumble it trickles down to you as well
[00:49:54] Matt Pettit: I should have had the saying without that happening. Cause texture that the best analogy is some of the substance abuse, right? Some of the larger consolidators six or seven years ago had their issues. And then, you know, some that went out and did their deal. Then you start once that happens, people go safe again, let’s go back in the water.
[00:50:15] The mentality here is real and if it’s great, people can convince themselves to pay more because the other guy just paid a little bit more for the house. But if one of those houses give below the mortgage value, everybody’s got an investment committee who’s going to see that, and that will impact.
[00:50:36] Kathleen Stengel: I agree with Dexter. I mean, the risk is again, coming back to the provider and how they provide services. So that standards and keeping to those methods is key to avoid that long-term risk of somebody doing something terrible, so to speak.
[00:50:51] Dexter Braff: Well, and this came up, this came up in the McGuireWoods.
[00:50:56] One of the things that people need to be aware of is that we’re not the only ones that are looking at all the money coming into healthcare. The regulators are looking and one of the most frightening things that ever happened to me was I found out that MAC, which is the Medicaid/Medicare advisory council that advises Congress on all things reimbursement, floated the braff group, talking about how good the market is.
[00:51:22] And I was like, okay, I don’t want them to be doing that, but they’re doing it because they’re trying to get people to be aware that maybe it’s too much profit that’s coming into these spaces. So these high-flying investments, they do well. That’s good. But it often draws the regulators in. Why is there so much money?
[00:51:42] And if there’s a lot of money or redoing something wrong on the reimbursement side.
[00:51:46] Matt Pettit: Dexter, you and I, and Nancy and Ted, and the rest of your awesome team have had this conversation a lot. And I always say to them, I was lucky enough to work for an investor or in my career, who said, if you can make money at a certain percentage of Medicaid reimbursed business, you don’t have a business.
[00:52:06] So anything we look at where they have some of these astronomical margins, we underwrite it down to a normal margin and not to say that it’s going to happen, but in our view, 10Ks, 10 Qs pick your SEC filing anyone at med packs and read those too. And, everybody deserves a fair living way and to save for their family and build what net worth.
[00:52:26] We truly believe in that. But when folks are making, you know, over half a dollar in profit for every dollar they get in the door, that’s a little concerning. It is something that could be around in 10 to 15 years. Yeah.
[00:52:41] John Yedinak: So here’s our guys, we’re almost at the end here. I, I guess I’d love to, as kind of the final question with valuations.
[00:52:52] How, how are you guys looking at growth right now with, you know, are there still acquisitions out there for you guys to make? Are you really focused more on to Nova? I guess I’d love to kinda end with that. Where do you, how do you guys see growth?
[00:53:04] Kathleen Stengel: I definitely would acquire small shops.
[00:53:06] I’m not looking for anything with a large presence in any way. Again, I’m regional. So I want to stay in the region. We want to expand and so really Denovo is the name of our game.
[00:53:19] Matt Pettit: Same thing we’re acquiring small. We opened four Denovos last year. Would do we do? A transformational large acquisition. I’m not going to say no, but it would have to be the perfect scenario.
[00:53:31] I think that this is a flight to quality, not to a flight to quality in our minds right now.
[00:53:38] Dexter Braff: Yeah. I mean, in any sector that sees a rapid increase in a niche market, you’re going to see a slow down at some point because the number has a track of acquisition candidates. So we’ve seen that happen in the autism market and in the medication assisted treatment market. Are there properties available?absolutely. Is it a little bit more challenging to find them? absolutely, depending on the space. I think the most open market right now would be the mental health space because it’s the newest one that people are tapping into, but there is the acquisitions are at a faster pace than new startups are having.
[00:54:16] So there is just the plant supply and demand issue that does come into play. And so eventually you’re going to kind of part in the marketplace where you might be at an elevated level, but it just can’t get higher because you just can’t turn around enough opportunities that are big enough for or attractive from a provider.