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Piecing together a fragmented market

May 6, 2015
by Bill Bithoney
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The behavioral health market is fragmented and overwhelmingly dominated by small providers with no national footprint. By some estimates, only a small fraction of mental healthcare is delivered by large national, even large state, providers.

When Florida’s Aspire Health Partners, for example, formed out of the merger of three entities, it became one of the largest behavioral healthcare providers in the southeast. Aspire serves a county of 1.2 million people, about 6 percent of Florida’s total population. The parent company of Florida’s Blue Cross and Blue Shield entities, in turn, has a 51 percent market share in the state, according to Kaiser Family Foundation analysis.

Private equity-based roll-ups of smaller providers may be able to drive significant economies of scale, resulting in both clinical and administrative standardization. In other areas of the healthcare market, such standardization has resulted in improved health outcomes and decreased costs.

Given the ease of billing, supply/demand imbalance and newly mandated insurance coverage for millions of new patients, it is not surprising that it is common for behavioral health programs to have financial margins of 20 percent to 30 percent. Further, due to the chronicity of the diseases treated, these revenue streams are secure.

For example, patients treated for opioid abuse frequently require chronic mental health consolation and treatment with drugs such as methadone or Suboxone (buprenorphine).

Insurance payments, risks and rollup opportunities vary considerably among substance abuse, anxiety treatment and other subspaces, and investors evaluating opportunities do well to understand the following about their potential investments:

1. Market opportunities, including an overview of consolidation activity and the supply and demand for the services the entity provides

2. Growth drivers specific to the care subspace, population and the geography

3. Risks, including those not generally present in acute care acquisitions, e.g. legal or public affairs considerations, staffing and co-location of, e.g., substance treatment with primary care provider

4. Future regulatory and reimbursement scenario simulations, especially as coverage for behavioral healthcare expands and insurance companies increasingly base payments on measureable outcomes

Over the next five years, we envision more and more consolidations, mergers and acquisitions in this field as investors recognize the unique confluence of investment opportunities inherent in a market dominated by small niche behavioral health programs. As these programs join together, they will be able to create value for patients, communities and investors. The efficiencies created should result in improved care delivered by highly profitable, clinically excellent programs.

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