That the merger and acquisition market for high-end residential treatment centers has cooled in recent years is no surprise to Dexter Braff, MBA, MS, president of The Braff Group. But have buyers turned toward lower cost, in-network, less expensive, private-pay and state-funded residential providers instead? Not entirely, Braff told attendees of the Treatment Center Investment & Valuation Retreat on Monday in Scottsdale, Arizona.
After peaking at 18 transactions in 2016, deals for high-end residential programs are on pace to finish at eight for the second consecutive year, Braff said. There were 18 deals for non-luxury residential programs in 2018, but transactions in that area are not matching that pace in 2019 and have been uneven overall.
Braff has three theories for the M&A trends observed in the past five years:
First, buyers largely have skipped over residential and focused on even lower-cost non-residential, community-based programs and medication-assisted treatment programs. “The high-end residential programs left a bad taste in people’s mouths in terms of the reimbursement challenges,” Braff said. “Investors tend to be knee-jerky. They’re not subtle. They say, ‘Oh, that didn’t work out so well. What else can we do?’ ”
For many, the answer has been MAT.
“They focus some attention on the PHP/IOP programs and mental health, but they focus most of their dollars on medication-assisted treatment, and understandably so,” Braff said. “It works. If you define ‘works’ as meaning staying out of jail, staying sober, staying with your family and keeping your job, if that’s your benchmark, it works.”
Second, Braff said, the investment cycles of private equity are not necessarily compatible with the timeframe needed for a full treatment continuum. “They were looking for where they can have a discreet investment, and they weren’t looking to go ‘let’s create this full, end-to-end service line,’ ” Braff said. “That’s where the future is, in my humble opinion, but that’s not where the private equity money is because they’re not patient investors.”
Third, investors have become distracted by other opportunities. Acquisitions of autism treatment providers have had an unprecedented surge, with about 50 such deals projected by the end of 2019, 90% of which have been completed by private equity firms.
Braff, meanwhile, said all of this has created an opportunity for patient investors and strategic players.
“All of healthcare is moving toward having more of a continuum of services and taking a global payment of some form to treat a global population base,” he said. “I’m not sure that works with addictions. It might, but the whole idea of a full continuum, from a clinical perspective, I’m not a clinician, but you know that’s the right way to go. Every fiber of your being says that’s got to be the way to work. … A patient investor or strategic player has a great opportunity to go where investment dollars aren’t going.
“If I were in the business and I wanted to build a program, I’d build an end-to-end program that covers a tight geographic footprint.”