As the Federal Reserve continues to raise interest rates, many behavioral health stakeholders are tightening their belts on M&A deals. But for suppliers with money, it may be the best time to strike.
“What we’re seeing when we talk about acquisitions is that people are leaving faster and they don’t want to pay as much,” said David White, CEO of BayMark Health Services, during a panel at Behavioral Health Business’ INVEST . “We’re sitting there with some dry dust and we can wait it out. It was really helpful from an acquisition perspective; we are able to acquire now and we see some people who have acquired who are not now.”
BayMark Health Services is a behavioral health provider focused on substance use disorder treatment with more than 400 treatment facilities in 37 states.
But White isn’t the only behaviorally-minded CEO on M&A in 2023. Mindpath CEO Christopher Brengard echoed those sentiments and is looking to go full steam ahead on acquisitions.
Mindpath Health is an outpatient behavioral health provider with 650 mental health clinicians and more than 100 locations. Mindpath was acquired by Community Psychiatry in 2021. It has since made a number of acquisitions, including virtual mental health provider Acacia Counseling and Wellness and Psychiatric Centers in San Diego.
Refresh CEO Steve Gold has a similar perspective.
“M&A is still a big part of what we do at Refresh,” Gold said. “We are still interested in partnering with great clinicians, psychiatrists, practice owners who want to take their practice to the next level.”
Refresh Health has more than 300 outpatient locations in 37 states. Its services include SUD treatment, mental illness, eating disorders, couples therapy, psychiatry, and more. It was acquired by UnitedHealth Group’s (NYSE: UNH) Optum health services division in March for an undisclosed sum.
Although behavioral M&A has been declining year-on-year, there is still a steady flow of deals in the sector. In the key year of 2021, there were 158 behavioral health deals, in the first half of 2022 there were 70 deals, according to Merz Taggart.
A bear market forecast could mean less competition for established players in behavioral health. Conversely, market headwinds can be particularly difficult for suppliers who have gotten in over their heads.
“I think there are people who are racing a little bit, trying to grow too fast and really not understanding the challenges in productivity, utilization and working with insurance companies,” Brengard said. “It’s a great industry and I think if you’re just patient, I think it’s all very workable.”
Experienced M&A operators are now fine-tuning exactly what they are looking for in potential acquisition targets. BayMark focuses more on strategic than opportunistic transactions, White said. The organization aims to mobilize acquisitions to integrate services within the marketplace — for example, drug-assisted treatment, residential inventory and detoxification.
“It’s becoming a real cost-effective way to deliver care,” he said.
Many behavioral health providers are looking to grow through a combination of acquisitions and de novos.
“We continue to be optimistic, the pipeline is full, we are extremely selective,” Brengard said. “We focus on very specific markets that meet our needs, and then open up density in the markets we’re in. And then we complement that with pretty steady organic growth.”
Potential for digital adoption and acquisitions as valuations decline
While geographic growth is a key element for many deals, others are looking to the virtual space for the future. Digital behavioral health as a sector will raise more than $5.5 billion in 2021.
Many of these companies are beginning to look for exit strategies as funding begins to withdraw.
More traditional players are starting to integrate virtual deeper into their services.
“We bought a technology company called Kaden Health,” White said. “Our goal is to have about 30% virtual where people can get virtual treatment in a … rural area [or] they can come to see our psychiatrists or mid-care staff if they need to. I think this is important for behavioral health.
But the digital mental health space is still in its infancy, and taking bets in this space is high risk.
There will be winners and losers among VC- and PE-backed companies, Gold said. Funding fuels a lot of advertising, recruiting and overpaying in certain areas.
“I think it’s going down because there’s not an unlimited amount of capital,” he said.
Legislative uncertainty in the virtual mental health space may also affect consolidation efforts in the future.
“We’re starting to see that some people have made some trips, people that have gone to the state and maybe have a total virtual presence, and then the state says you have to see someone once a year,” White said.
Deepening clinical due diligence
The due diligence process is one of the most important elements to a successful deal, according to Gold.
“Whatever clinical practice you acquire, make sure you take care of it,” Gold said. “Make sure the clinician is actually an expert in the field, whatever, don’t just buy the group because it has 100 clinicians.”
The ability to track and demonstrate measurable results, which behavioral health is known to lack, is also key to scaling a business.
“We literally close 5% of the deals that we work hard on,” Brengard said. “It really comes down most of the time to clinical leadership and clinical outcomes, whether or not we agree with the clinical programs or not, whether or not we believe they fit into our spectrum of services, whether it’s someone we want to let’s be partners.”