Factors Contributing to Mental Health Growth & Transaction Activity

Volume 9, Issue 26, December 21, 2022

It's been a wild ride for M+A activity in the healthcare space these past few years, with several significant global and domestic issues impacting deal flow. The effects of the COVID-19 pandemic will be felt for a long time. Russia's invasion of Ukraine has created global uncertainty. Domestic inflation has created cautious investors. Labor shortages have decreased profits for many providers.

All of these weighed down the healthcare space, yet it's estimated that of the $1.6 trillion in "dry powder" (i.e., unspent capital) globally, 15% is expected to be allocated to healthcare. And of that 15%, I expect a good percentage to go toward behavioral health.

Following the lull of transaction activity that affected all of healthcare in the first several months of the COVID-19 pandemic, the behavioral health space has experienced fairly steady transaction activity, including some large deals that had ripple effects throughout the space.

What's behind all this activity? Let's look at six of the biggest contributing factors.

1. Behavioral health providers are seeing the opportunity for consolidation and diversification to strengthen their market share. One of the reasons why: M+A internal rates of return have outperformed other markets for the last 10 years by approximately 6%. In addition, behavioral health providers understand that the pandemic has changed service delivery and pushed providers to embrace innovation more aggressively. For example, telehealth and value-based care now seem like they will be requirements for long-term success whereas neither, and certainly not telehealth, were on many providers' radars pre-2020.

2. The behavioral health industry is highly fragmented and attractive to investors due to its low overhead and recent history of improvements in reimbursement. Noteworthy improvements to behavioral health reimbursement began with the SUPPORT for Patients and Communities Act (SUPPORT). The bill is one of the most significant legislative overhauls addressing a substance abuse epidemic in recent history. SUPPORT has turned out to be a tailwind to the behavioral health industry — specifically those focused on the treatment of substance use disorders (SUD).

3. Changes to the coverage of medication-assisted treatment (MAT) have helped strengthen behavioral health providers' ability to treat more patients, which has also increased their bottom lines. All state Medicaid programs are required to cover MAT, including related counseling and behavioral health services, through fiscal year (FY) 2025. This requirement took effect in FY 2020.

We have also seen expanded access to MAT thanks to regulatory changes that increased the number of patients a physician or qualified practitioner can treat with MAT drug buprenorphine at any one time and looser restrictions on the types of providers who can prescribe MAT. The finalized 2023 Medicare Physician Fee Schedule (PFS) rule permanently extends the COVID-19 public health emergency (PHE) allowance for opioid use disorder treatment programs to begin MAT without buprenorphine via telehealth. The PFS also allows for providers to bill for services provided by licensed counselors and therapists, as well as mental health disorder and SUD treatment, under general supervision rather than direct supervision. This rule change will help increase capacity for treating more people, especially those with limited access to care.

4. The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) allocated $425 million to the Substance Abuse and Mental Health Services Administration to fund many initiatives, including the Certified Community Behavioral Health Clinic Expansion Grant program ($250 million), suicide prevention programs ($50 million), emergency response services in local communities ($100 million), and tribal and urban Indian health organizations ($15 million). This funding helped behavioral health providers financially recover from the effects of the COVID-19 pandemic and expand their services to help a population with growing behavioral health needs.

5. The ability to provide behavioral health services via telehealth has been a gamechanger for those providers that have established tele-programs thanks to regulatory changes that have made it financially worthwhile to offer virtual services. The 2019 SUPPORT Act allows telehealth treatment of SUD and cooccurring mental health disorders payable by Medicare without in-person visits.  

In early 2022, the Centers for Medicare & Medicaid Services (CMS) expanded and extended Medicare coverage for behavioral health-related telehealth services through the PFS, which was extended under the final 2023 PFS. Most notably, CMS permanently expanded coverage for the diagnosis, evaluation, or treatment of certain mental health disorders to include services delivered to beneficiaries located in their homes. CMS also permanently expanded coverage for audio-only telecommunications for mental health disorders when certain conditions are met.

6. In the past, facilities and providers could use an out-of-network (OON) strategy to receive higher reimbursement rates. With increasing regulatory pressures, it is becoming much more difficult to execute a successful OON practice. As providers move toward an in-network strategy, many existing providers are acquiring other in-network practices to leverage economies of scale and negotiate better rates with payors.

Behavior Health an Area Ripe for Investment

In years past, behavioral health services were considered "preventive" and often the first state/federal budget cut during difficult economic times. With the acknowledgement of the opioid pandemic, a spotlight on mental health and its effects on wellbeing, greater understanding and appreciation for how mental health affects physical health, and progress toward the de-stigmatization of therapy and behavioral health supports, this industry is seeing a significant transformation. COVID-19 not only shined a spotlight on the need for more and improved behavioral health care but also provided opportunities for providers to show how telehealth can help bridge the gaps of care. This perfect storm has created a rich opportunity for consolidation and investment in the behavioral health space.