by CEO Marc S. Cooper
From COVID-19 and changing regulations to rising interest rates and inflation, the past few years have been both exciting and challenging for companies operating in the behavioral healthcare space. I recently spoke with Whit Knier, a Partner in our Healthcare Group who has been advising companies in the industry for more than 20 years, about sector trends, including how new legislation is affecting deal activity, and what portions of the behavioral health industry may see the most M&A activity in the coming months.
Whit, can you share a bit about your background and why you joined Solomon Partners a little over a year ago?
I have advised companies in a variety of verticals within the behavioral healthcare space, as well as veterinary services companies, and contract manufacturing businesses on the medical device and product side of the healthcare industry. I have also worked with outsourced clinical services platforms.
I came to Solomon Partners because I was excited by the opportunity to help build and grow a team. Since joining, we have recruited several industry experts who have deep experience across a range of sectors. Our team benefits from true cross-functional expertise that allows us to fully occupy this space and operate on stronger footing than firms that have a more siloed approach.
There is a lot of excitement around M&A in the behavioral healthcare space. What trends are you seeing and what areas offer the most promise?
We believe that behavioral health is attractive for investment given ongoing demand for care and an unmet need across multiple specialties. Behavioral health is a broad category, encompassing a range of services, including substance abuse, mental health, eating disorders, autism, and intellectual disabilities, among others.
From an M&A standpoint, we are seeing deal activity in sectors that cater to vulnerable, high-demand patient populations, such as autism and intellectual developmental disabilities (IDD), which remain largely fragmented.
Given the fragile patient populations providers in these sectors serve, coupled with ever-increasing demand, often resulting in significant waitlists for care, we believe these sectors are well-insulated, which is a priority given ongoing uncertainties around Medicaid funding.
Speaking of federal funding, how will the new federal budget impact investment in this space? Are certain types of businesses more insulated from potential funding cuts?
Yes, the Big Beautiful Bill, and its potential effect on patient populations, is significantly influencing investment. Businesses serving highly vulnerable populations are likely to continue operating at their current funding levels, and that is making them more attractive for M&A activity.
So, autism, IDD, and adolescent/young adult and geriatric patients are less likely to be affected by work requirements included in the spending bill, meaning they will continue to qualify for Medicaid reimbursement.
Alternatively, businesses that cater to middle-aged, seemingly able-bodied groups, such as those with substance abuse disorders, may face greater challenges. There is more risk of patients not meeting the standard for reimbursement, and we are consequently seeing lower levels of investment.
Coming out of COVID-19, we saw renewed discussion around the importance of mental and behavioral health. How has this impacted dealmaking within the field?
It is absolutely driving deal activity. During COVID-19, people felt isolated. Additionally, there is far greater awareness and acceptance of the benefits of mental and behavioral treatment. These factors have sparked heightened demand for therapy services.
Coming out of the pandemic, we saw an explosion of deal activity within the outpatient mental health space, including deals such as LifeStance, Refresh Mental Health and Mindpath, which offer both in-person and virtual talk therapy.
However, now that we are a few years post-pandemic, we are seeing that these businesses are complex to operate and scale effectively. Clinician recruitment and retention is paramount. There also is not a ton of margin on pure one-on-one talk therapy. Platforms often have had to spend a lot on patient acquisition without profitability to match and have struggled to differentiate themselves from other businesses.
So, we have seen a move away from the lower end of the spectrum to a focus on medication management and higher-acuity interventional lines of therapy, such as ketamine or transcranial magnetic stimulation, used to treat major depressive disorders and obsessive-compulsive disorders.
It is more of a refocusing on areas of mental health that patients might turn to after having been initially unsuccessful with pure talk therapy, anti-depressants, or a combination of both.
What are you most excited about as you consider the investment landscape within behavioral health over the next few years?
Across a variety of behavioral health sectors, we continue to see persistent demand/supply imbalances, making the field a very attractive investment area. In an improved labor environment, providers are better able to recruit and staff to meet demand, supporting a return to growth for many platforms.
Through deliberate investments in people, systems, and processes, I have seen a number of providers make significant strides in how they are managing expanding their businesses in a far more data-driven way. This benefits not only their growth and profitability profile, but also how they are able to interact with their patients, referral sources, and payers.
Platforms that are able to demonstrate high levels of clinical efficacy and quantify the value of the care they deliver—given the comorbidities and downstream costs of mental health issues—will be the real winners. Ultimately, I expect businesses that are truly differentiated in the areas they serve will continue to garner strong valuations.
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