The behavioral health sector realized a 24 percent increase in deal volume from 2013 to 2014, according to PwC, and the momentum has certainly continued so far this year. Several noteworthy trends mark the current merger and acquisition activity in behavioral health.
1. Deal volume is up.
“One of the hottest spaces in healthcare now is the broader behavioral health space for both strategic and financial buyers,” says Jonathan Krieger, managing director at Berkery Noyes.
He says legislation is a significant catalyst, with federal laws, such as the Affordable Care Act, and state laws, such as those around autism services, increasing coverage and payment for services. Additionally, because the market is so fragmented, there are plenty of opportunities for buyers.
“It’s a high growth market that is largely unpenetrated today with huge growth characteristics—that has all the attributes that acquirers want to increase their exposure to,” Krieger says.
Through the first three quarters of 2015, there were 28 deals in the addiction sector alone, according to Dexter Braff, president, the Braff Group. The trend follows last year’s record of 35 transactions.
“We are on-pace to have the fifth consecutive year of transaction growth,” Braff says.
Both Krieger and Braff note that there is competition among buyers for acquisitions, particularly for treatment centers that have stable, predictable revenue streams.
2. More private equity is coming into the addiction market.
According to Braff, this year is also on-pace to break a record in terms of private equity investment. In 2013, there were five new private equity entrants in the addiction market, followed by two in 2014. However, in 2015 so far, there are already seven—a big jump.
“When you have seven new private equity entrants, that by itself says there is new competition to make investments in the space,” he says.
Deals will allow groups to leverage infrastructure, make new portfolio acquisitions or launch de novo properties.
3. There’s interest in a broader range of treatment centers.
While location can make a difference in acquisition strategy, the appetite among buyers in terms of clinical capabilities and treatment models is changing.
“It’s a product-line play. Buyers are looking for something more than the previous focus on high-end, residential centers with private pay,” says Braff of the addiction market.
While the residential centers will continue to be in demand, medication assisted treatment (MAT) providers are starting to gain attention. Annual costs of MAT are much lower for insurers than most residential programs, so Braff predicts more favor falling on MAT.
Additionally, the White House has called for new efforts to reduce barriers to MAT, such as training more physicians to prescribe the medications and allowing them to manage more patients than current policy permits. MAT is also a more uniform clinical delivery process, making it easier for buyers to consolidate, according to Braff.
Eating disorders and dual-diagnosis treatment will be attractive in the coming quarters as well.
Krieger says favorable legislation has driven up service demand and notes that 43 states now have insurance reform related to autism services. Treatment of autism with applied behavior analysis is a gold standard, making it the hottest area for investment in the broader behavioral segment right now, he says.
What’s more, the Centers for Disease Control and Prevention (CDC) recently released survey results related to the prevalence of autism, showing what could be an increase in the number of children affected to one in 45. CDC cautions that part of the increase could be explained by the fact that the most recent questions were worded differently compared to previous surveys.
“It’s difficult to enter the autism market without expertise in treating children with specialized needs so those that succeed are those with domain expertise,” Krieger says.