UHS deal shows the growth potential in psychiatric care
Over the past few years, Psychiatric Solutions, Franklin, Tenn., has demonstrated the increasing value of psychiatric facilities. The company showed that first as an acquirer, including major corporate deals in 2005 and 2007. Last week, Psychiatric Solutions went from acquirer to acquired, as Universal Health Services, King of Prussia, Pa., completed the biggest healthcare services transaction of 2010, paying $3.33 billion in cash, assumed debt and acquisition costs to takeover Psychiatric Solutions. Universal agreed to divest four psychiatric hospitals (three of them Psychiatric Solutions facilities) to win antitrust clearance from the Federal Trade Commission last week.
The acquisition of Psychiatric Solutions expands Universal’s portfolio from 32 to 37 states, deepens the management pool and strengthens it financially because of its greater size and more diversified assets, Alan Miller, Universal’s chairman and CEO, said in an interview. Universal acquired its first behavioral assets nearly 30 years ago, but the real expansion into the sector came with its acquisition of 12 hospitals from the former Charter Behavioral Health Systems, Alpharetta, Ga., in 2000 (Aug. 28, 2000, p. 15), Miller said.
“We have the diversification in two businesses that we’ve been in for a number of years, and we find them to be complementary,” Miller said. One complement is in terms of investor sentiment—when investors like one sector but not the other, Universal is protected, he added.
The senior executives of Psychiatric Solutions did not stay on after closing, but Universal is retaining managers at the facility and regional levels and hopes to draw on their experience, Miller said. “We don’t have every answer in the business,” he added.
The senior executives who founded Psychiatric Solutions in 1997 won’t go away empty handed, however, according to a securities filing Psychiatric Solutions made in July. For example, Joey Jacobs, chairman, president and CEO will take home $50.6 million, including a severance package of nearly $14.2 million, and $23 million in stock options and $13.4 million in restricted stock grants that were cashed out as a result of the deal, according to the filing.
The behavioral sector also is drawing renewed interest from private equity firm Welsh, Carson, Anderson & Stowe, which recently invested $100 million in equity with Springstone, a Louisville, Ky.-based company that owns a psychiatric hospital in Indiana.
Welsh Carson had exited the behavioralhealth sector more than five years ago when one of its portfolio companies, Nashvillebased Ardent Health Services, sold its psychiatric hospitals to Psychiatric Solutions for $560 million in cash and stock (March 14, 2005, p. 4), noted Darren Lehrich, a healthcare services stock analyst for Deutsche Bank. Behavioral Healthcare Corp. became Ardent after Welsh Carson took a majority stake in the company and brought in a management team to focus on general acute-care hospitals in 2001 (July 9, 2001, p. 13).
Welsh Carson’s renewed interest in psychiatric care is a positive sign of the opportunities in the sector, Lehrich said.
On the supply side, the number of psychiatric hospital beds, in free-standing psychiatric hospitals and psychiatric units within general hospitals, dropped by more than a quarter between 1995 and 2008, according to the American Hospital Association (See chart). The number of free-standing psychiatric hospitals dropped from 662 to 448 during that time period. Hospital-based units dropped from 1,507 to 1,320.
On the demand side, the mental health parity law and the likely expansion of insurance coverage under reform are likely to produce more patients. Behavioral health also offers hospital operators a respite from uncompensated care compared with medicalsurgical care, Lehrich said.
Greater awareness of mental illness and greater acceptance that mental illness is as serious as physical illness also should be positive factors for providers, Lehrich added. Finally, the aging of the population also should provide more patients, for dementia and Alzheimer’s treatment especially, he said.
Springstone executives see the same opportunities. The company’s chairman is Ken Newman, who founded Horizon Health Corp., Lewisville, Texas, a psychiatric hospital operator that was sold for $426 million in cash and assumed debt to Psychiatric Solutions in 2007, according to a securities filing. Its CEO is Earl Reed, a veteran of investor-owned healthcare companies such as LifeCare Management Services, Vencor (now known as Kindred Healthcare) and Humana.
“When you look at the entire country, with 308 million people, and the number of beds that existed 10 or 12 years ago and the number that exists today, there’s been a tremendous drop,” Reed said. “There’s room for a lot of players or a lot more hospitals.”