In­vest­ing in be­hav­ioral health

Mar­ket sees growth as more pay­ers cover treat­ment

Modern Healthcare - - FRONT PAGE - Beth Kutscher

At Castle­wood Treat­ment Cen­ter, pa­tients with eat­ing dis­or­ders re­ceive in­ten­sive, one-on-one ther­apy at three es­tate-like res­i­den­tial cam­puses nes­tled in the hills of St. Louis. The daily rate for an in­pa­tient stay runs about $1,100, a once-stag­ger­ing amount to treat con­di­tions like anorexia, bulimia and binge eat­ing, which re­quire 24-hour care.

Yet thanks to the 2008 Men­tal Health Par­ity and Ad­dic­tion Eq­uity Act, not only are more clients suc­cess­fully lob­by­ing their in­surance car­ri­ers for re­im­burse­ment, but the treat­ment cen­ters them­selves are see­ing a chang­ing busi­ness en­vi­ron­ment.

As pay­ers have started to cover more be­hav­ioral­health treat­ments, the sec­tor is get­ting an­other look from fi­nan­cial in­vestors who see a fast-grow­ing, high-per­form­ing mar­ket.

The Pa­tient Pro­tec­tion and Af­ford­able Care Act also is spurring in­vestor in­ter­est. The health­care re­form law re­quires small group and in­di­vid­ual plans to of­fer cov­er­age for men­tal ill­ness. The law also is ex­pand­ing the over­all num­ber of peo­ple with in­surance, in­clud­ing the key at-risk group of young adults.

Hunter Peter­son, a part­ner at Trin­ity Hunt Part­ners, which has made three be­hav­ioral-health ac­qui­si­tions since 2008, es­ti­mated that the mar­ket has be­come a “mas­sive in­dus­try” worth tens of bil­lions of dol­lars.

Peter­son said the num­ber of cov­ered lives is grow­ing more rapidly than the avail­abil­ity of ser­vices to treat them—cre­at­ing a high­mar­gin growth busi­ness. But deal­ing with in­sur­ers has also cre­ated new headaches, such as a need for fa­cil­i­ties to have strong cash flow when pay­ment may come in 30 to 90 days af­ter ser­vices are ren­dered.

And to get cov­er­age from health plans, treat­ment cen­ters need to ex­pand their ser­vices and “look and feel more like a hospi­tal and less like a very nice house,” Peter­son said.

All of that taken to­gether means scale and busi­ness acu­men are in­creas­ingly im­por­tant and are driv­ing con­sol­i­da­tion, he said. “The big­ger play­ers will get big­ger and the smaller play­ers will go away.”

While Castle­wood 10 years ago was largely a cash busi­ness, just 5% of its clients now pay out-of-pocket. The change in payer mix means the cen­ter needs more back-of­fice staff and up­graded IT sys­tems to work with in­sur­ers.

Trin­ity Hunt ac­quired Castle­wood in 2008, and Ex­ec­u­tive Di­rec­tor Nancy Al­bus said that the pri­vate eq­uity firm has al­lowed the treat­ment cen­ter to ex­pand from 10 beds to 16, and add 10 ad­di­tional day-treat­ment spots. “Our in­take of­fice dou­bled; our mar­ket­ing of­fice dou­bled,” she said. “Hav­ing a busi­ness in­fra­struc­ture was really key.”

Cen­ters that treat eat­ing dis­or­ders in par­tic­u­lar have been gar­ner­ing in­ter­est from in­vestors.

CRC Health Group, which op­er­ates about 140 be­hav­ioral-health fa­cil­i­ties and has been backed by pri­vate eq­uity firm Bain Cap­i­tal Part­ners since 2006, has been a long­time con­sol­ida­tor in the be­hav­ioral­health in­dus­try.

But over the last six to nine months, CRC Health CEO An­drew Eckert said the group has seen a “flurry of ac­tiv­ity” around eat­ing dis­or­der cen­ters. “We’ve cer­tainly seen very fa­vor­able pa­ram­e­ters,” he said, cit­ing long lengths of stay, avail­abil­ity of re­im­burse- ment and what is un­for­tu­nately a grow­ing dis­or­der.

“The de­mand really has been trig­gered by health­care re­form,” he said, as well as by what he called the “fail­ure to launch” gen­er­a­tion: young adults who now have in­surance cov­er­age un­der their par­ents’ plans un­til age 26. “The mar­ket has changed,” Eckert said. “Price ex­pec­ta­tions have cer­tainly gone up.”

Although in­vestors are also look­ing at other be­hav­ioral-health con­di­tions—par­tic­u­larly autism, an area of sig­nif­i­cant un­met need as chil­dren get older and be­come adults—Eckert noted that he hasn’t yet seen a sim­i­lar flow of re­im­burse­ment dol­lars.

Peter­son said the high mar­gins and quick growth op­por­tu­ni­ties have made the be­hav­ioral-health space more ap­peal­ing to pri­vate eq­uity firms than strate­gic buy­ers, such as other health sys­tems.

Yet Franklin, Tenn.based Aca­dia Health­care, one of the largest be­hav­ioral-health com­pa­nies, has seen the same macrotrends cat­a­pult it to a tremen­dous run in the stock mar­ket over the past 14 months, when its share price more than dou­bled.

“The in­pa­tient be­hav­ioral space has been pretty strong over the past 10 years,” said Brent Turner, the com­pany’s pres­i­dent, who cited “con­tin­u­ing aware­ness and pos­i­tive aware­ness” of men­tal dis­or­ders for the in­creased in­ter­est.

While about half of Aca­dia’s pa­tients were on Med­i­caid even be­fore the Af­ford­able Care Act was passed, Turner said, the ex­pan­sion of Med­i­caid pro­grams will lead to more in­di­vid­u­als with cov­er­age.

He also noted that treat­ment cen­ters are find­ing that size and scale are in­creas­ingly im­por­tant to com­pet­ing in the in­dus­try. “There’s more to be­ing suc­cess­ful than just be­ing in the space,” Turner said. “If you want to be big­ger, you need to be in more places.”

At Castle­wood, Al­bus noted that the busi­ness has been get­ting more com­pet­i­tive, with new cen­ters seem­ingly open­ing up on a monthly ba­sis. But Trin­ity Hunt’s in­vest­ment has al­lowed it to ac­quire new re­fer­ral sources and cer­ti­fi­ca­tions, as well as more name recog­ni­tion, she said. “It al­lowed us to feel like we were really ce­mented in a chang­ing en­vi­ron­ment.”

Castle­wood ex­panded to 16 beds af­ter be­ing ac­quired by Trin­ity Hunt.

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