Cov­er­age par­ity draws in­vestors to be­hav­ioral health

Modern Healthcare - - Q2 2015 HEALTHCARE MERGERS AND ACQUISITIONS REPORT - By Beth Kutscher

By early this year, Illi­nois had moved nearly half its Med­i­caid re­cip­i­ents into man­aged care in an at­tempt to im­prove care co­or­di­na­tion. For Well­Spring Re­sources, which op­er­ates be­hav­ioral health and sub­stance-abuse treat­ment cen­ters in Alton and Jerseyville, the shift served as a cat­a­lyst for change.

It had to grow if it was go­ing to have enough ne­go­ti­at­ing clout to win ac­cept­able con­tracts from the state’s des­ig­nated man­aged-care com­pa­nies. “We re­al­ized that we were go­ing to have a lot of chal­lenges ahead of us to reach the dreams that we have,” said Well­Spring’s in­terim CEO, Jen­nifer Craig.

The com­pany en­gaged an out­side fi­nan­cial ad­viser and launched a strate­gic re­view process, which cul­mi­nated in May with a merger agree­ment with Cen­ter­stone, which op­er­ates more than 120 fa­cil­i­ties in Illi­nois, In­di­ana, Ken­tucky and Ten­nessee. The deal also in­cluded Cen­ter­stone’s af­fil­i­a­tion with Prairie Cen­ter, which pro­vides sub­stance­abuse treat­ment in cen­tral Illi­nois.

The three-way trans­ac­tion was one of six be­hav­ioral health deals tracked in Mod­ern Healthcare’s sec­ond-quar­ter M&A Watch data­base. The quar­ter also in­cluded three ad­di­tional deals for com­pa­nies that of­fer prod­ucts and ser­vices to be­hav­ioral health providers, in­clud­ing elec­tronic health records and spe­cialty phar­macy ser­vices.

There also were seven be­hav­ioral deals in the first quar­ter, as well as an ad­di­tional trans­ac­tion in­volv­ing a com­pany that of­fers rev­enue-cy­cle man­age­ment ser­vices to be­hav­ioral health providers.

Pri­vate eq­uity firms were the buy­ers in four of the deals in the first half of the year.

The height­ened in­ter­est in be­hav­ioral health from in­vestors comes shortly af­ter new laws giv­ing treat­ment for men­tal dis­or­ders pay­ment par­ity with phys­i­cal ill­nesses went into ef­fect. In­sur­ers and gov­ern­ment pay­ers also are be­gin­ning to see treat­ment of be­hav­ioral health dis­or­ders as a wise in­vest­ment in their cov­ered pop­u­la­tions since these in­di­vid­u­als tend to be high users of costly emer­gency rooms.

Some of the pri­mary ben­e­fi­cia­ries have been fa­cil­i­ties that pro­vide treat­ment pro­grams for sub­stance abuse, eat­ing dis­or­ders and at-risk youth. Those cen­ters are now takeover tar­gets for larger com­pa­nies and in­vestor groups.

“There’s a lot of money out there right now that’s look­ing for (be­hav­ioral health) in­vest­ment,” said Col­bey Rea­gan, a Nashville-based healthcare at­tor­ney at Waller who pre­vi­ously served as deputy gen­eral coun­sel at Psy­chi­atric So­lu­tions.

The adult residential treat­ment space tends to at­tract pa­tients who can pay out of pocket or have com­mer­cial

in­sur­ance. Fa­cil­i­ties tend to be more lux­u­ri­ous than a typ­i­cal psy­chi­atric hos­pi­tal, Rea­gan said, with home­like set­tings, of­ten in pas­toral lo­ca­tions.

The busi­ness is easy for in­vestors to un­der­stand and loosely reg­u­lated. Within be­hav­ioral health, sub­stance abuse is “the hottest space of them all right now,” Rea­gan said. “That’s just on fire.”

An in­crease in in­sur­ance cov­er­age has also bol­stered what used to be a largely self-pay mar­ket. The two most sig­nif­i­cant pieces of leg­is­la­tion for the in­dus­try have been the 2008 Men­tal Health Par­ity and Ad­dic­tion Eq­uity Act, which re­quires group health plans to pro­vide equal ben­e­fits for both men­tal and phys­i­cal dis­or­ders, and the Af­ford­able Care Act, which al­lowed young adults to stay on their par­ents’ plans un­til age 26.

States also are pay­ing more at­ten­tion to sub­stance abuse and other be­hav­ioral health dis­or­ders. In Ver­mont, Gov. Peter Shum­lin ded­i­cated nearly his en­tire 2014 State of the State ad­dress to opi­ate and heroin ad­dic­tion. The fol­low­ing year, New York state At­tor­ney Gen­eral Eric Sch­nei­der­man reached a $900,000 set­tle­ment with health main­te­nance or­ga­ni­za­tion Value Op­tions (now Bea­con Health Op­tions) for al­legedly vi­o­lat­ing state and fed­eral par­ity laws by deny­ing be­hav­ioral health treat­ments to ben­e­fi­cia­ries.

In the fi­nan­cial mar­kets, in­vestors closely watched the ini­tial public of­fer­ing of AAC Hold­ings, a Brent­wood, Tenn.-based provider of in­pa­tient sub­stance-abuse treat­ment. The com­pany’s shares de­buted last Oc­to­ber at $20 on the New York Stock Ex­change and this month hit a high of $46.60. AAC, which op­er­ates as Amer­i­can Ad­dic­tion Cen­ters, has forged six deals since its IPO.

“In­sur­ance com­pa­nies are re­ally start­ing to rec­og­nize this as a dis­ease,” said com­pany CEO Michael Cartwright, who is 23 years sober af­ter bat­tling his own ad­dic­tion. “You’re also start­ing to now see mul­ti­ple states say this is a prob­lem. You have a lot more peo­ple be­ing able to re­ceive treat­ment.”

The same month that AAC launched its IPO, Aca­dia Healthcare, the fast-grow­ing op­er­a­tor of psy­chi­atric hos­pi­tals, made a $1.2 bil­lion bid to ac­quire CRC Health, a sub­stance-abuse treat­ment provider. Aca­dia fol­lowed that deal with its March takeover of Qual­ity Ad­dic­tion Man­age­ment for $53 mil­lion.

“Once Aca­dia bought CRC, it demon­strated that the ver­ti­cal can sup­port deals of this mag­ni­tude,” said Erik Kistler, vice pres­i­dent at Edge­mont Cap­i­tal Part­ners, a healthcare in­vest­ment bank. “And that was a sign that con­sol­i­da­tion could be sup­ported.”

CRC treats 42,000 pa­tients a day in residential and com­pre­hen­sive treat­ment cen­ters. With the ac­qui­si­tion, Aca­dia’s payer mix has shifted from 70% gov­ern­ment in­sur­ance to 35%, Aca­dia Pres­i­dent Brent Turner said dur­ing a pre­sen­ta­tion at Avon­dale Part­ners’ April be­hav­ioral health con­fer­ence, which brought to­gether be­hav­ioral health com­pa­nies and in­vestors.

Cartwright sim­i­larly pointed to the CRC deal as adding more le­git­i­macy to the sub­stance-abuse space, and the cap­i­tal mar­kets have re­sponded ac­cord­ingly. AAC in March re­ceived a $125 mil­lion credit fa­cil­ity that will be used in part for ac­qui­si­tions.

“There are thou­sands of these oper­a­tions that we can buy up over the next five to 10 years,” Cartwright said. “Our field has been highly un­der­funded for way too long.”

Cen­ter­stone, a not-for-profit be­hav­ioral healthcare provider, also has been grow­ing rapidly. With Well Spring Re­sources and Prairie Cen­ter, its 15th and 16th af­fil­i­a­tions, Cen­ter­stone has be­come an or­ga­ni­za­tion with $220 mil­lion in rev­enue. It also is in the con­fi­den­tial­ity stage of other deals that could add another $125 mil­lion in rev­enue.

“We’re very much on this jour­ney of get­ting to ideal scale,” said CEO David Guth.

The Well Spring ac­qui­si­tion not only pro­vided Cen­ter­stone with ad­di­tional scale, but gave Well Spring ac­cess to the Cen­ter­stone Re­search In­sti­tute. As sub­stance abuse cen­ters pro­lif­er­ate in a largely un­reg­u­lated mar­ket, many providers are try­ing to dif­fer­en­ti­ate them­selves with re­search and data.

Well Spring, for in­stance, con­ducted a quar­terly eval­u­a­tion of 435 pa­tients and found that none of them re­quired an emer­gency room visit or hos­pi­tal­iza­tion de­spite the high preva­lence of co­mor­bidi­ties in the sub­stance-abuse pop­u­la­tion.

“What was most at­trac­tive to us was (Cen­ter­stone’s) re­search in­sti­tute,” Craig said. “It’s very dif­fi­cult at our scale to do that in a sci­en­tific way.”

Cen­ter­stone also pro­vided ad­di­tional re­sources to build its health in­for­ma­tion tech­nol­ogy ca­pa­bil­i­ties, she added.

Ven­dors that cater to the be­hav­ioral health mar­ket could be next to con­sol­i­date as providers in the space be­come less frag­mented. Kistler of Edge­mont Cap­i­tal Part­ners said he’s per­son­ally aware of at least four elec­tronic health-record plat­forms for be­hav­ioral health fa­cil­i­ties. “Four can’t be mak­ing money in this mar­ket,” he said.

The uptick in be­hav­ioral health deals fol­lows an over­all in­crease in M&A ac­tiv­ity in the sec­ond quar­ter. Mod­ern Healthcare’s M&A Watch tracked 314 deals with a pub­licly dis­closed value of $176.4 bil­lion. Nearly a third of the deal value came from a sin­gle deal in the in­sur­ance sec­tor— An­them’s $53.8 bil­lion bid for Cigna Corp.—but providers were the most ac­tive deal­mak­ers, ink­ing 41.1% of the quar­ter’s trans­ac­tions.

In­sur­ance deals also are likely to dom­i­nate the third quar­ter’s num­bers af­ter Aetna made its $37 bil­lion bid to ac­quire ri­val Hu­mana, and Med­i­caid man­aged-care in­surer Cen­tene Corp. of­fered $6.3 bil­lion to buy fel­low in­surer Health Net. Both bids were an­nounced in July.

Although deal vol­ume was 9.1% higher than dur­ing the sec­ond quar­ter of 2014, deal value still lagged the prior-year pe­riod’s $229.8 bil­lion, a peak largely fu­eled by Big Pharma’s tax in­ver­sion plays. Nev­er­the­less, the quar­ter’s $176.4 bil­lion was still the sec­ond-high­est level of deal value tracked by Mod­ern Healthcare’s M&A Watch since at least 2012.

Pri­vate eq­uity ac­tiv­ity also in­creased in the quar­ter, with 51 trans­ac­tions, a 13.3% in­crease year over year.

Fi­nan­cial in­vestors like the residential treat­ment sec­tor be­cause it has a straight­for­ward busi­ness model and isn’t par­tic­u­larly cap­i­tal-in­ten­sive, Kistler said. “Once you’ve done the ini­tial R&D, it’s only pen­nies to up­keep,” he said. “From a busi­ness per­spec­tive, you’re not go­ing to see things slow down.”

Yet not all com­pa­nies look­ing to ex­pand in the be­hav­ioral health mar­ket have an ac­qui­si­tion strat­egy. HCA, the largest hos­pi­tal op­er­at­ing com­pany by rev­enue, has had a ded­i­cated fo­cus on be­hav­ioral health since 2009, said Terry Bridges, the chain’s pres­i­dent of be­hav­ioral health. The growth op­por­tu­nity has come partly from its own emer­gency rooms, where from 2% to 10% of the pa­tients who walk in have a be­hav­ioral health con­di­tion.

“We’re go­ing to con­tinue to grow the psych side of the busi­ness,” Bridges said at the Avon­dale con­fer­ence. Sub­stance-abuse pro­grams are “part of our agenda for this year,” he noted, but added that the com­pany hasn’t made a move yet.

Still, he ac­knowl­edged af­ter his pre­sen­ta­tion that HCA, with its al­ready-large pa­tient base, has tra­di­tion­ally pre­ferred to build new fa­cil­i­ties rather than buy them. It can do so more cheaply at $200 per bed com­pared with buy­ing them at a cost of $500 to $600 per bed.

“We want to see what fits our model” when en­ter­ing the ad­dic­tion treat­ment space, he said.

Down­load the com­plete 2015 Q2 Healthcare M&A Watch re­port at modernhealthcare.com /mawatch

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