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Ripe or rancid? How to tell a good behavioral health acquisition from a rotten one

April 2, 2015
by Bill Bithoney and Patrick Pilch
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Behavioral Healthcare Deal Insider Blog

Investors rightly recognize great potential in the behavioral health and substance abuse (SA) treatment market, but sorting out good investments from bad requires more than just a cursory squeeze of the fruit.

In 2010, an estimated 22.1 million Americans 12 or older were dependent on drugs or alcohol, according to federal statistics, but only 4.1 million had received treatment or therapy in the last year. Much of that care has historically been delivered by small providers, with little of it affiliated with health systems.

And so investors are adding pieces of the fragmented substance abuse care delivery system to their portfolios, intending to roll them up and integrate them into clinical networks. Medicaid reform initiatives—such as New York state’s Delivery System Reform Incentive Payment program, which mandates the integration of primary, specialty and behavioral healthcare—are catalyzing this effort. Many good deals are being done, and investors have considerable opportunity in a market that must be consolidated and integrated into the new value-based care delivery paradigm.

But many bad deals are also being done. The problem is some SA treatment methods are rooted in ideology, not science, even though the evidence base for treatment today is growing. Of 59 alcohol and other SA treatments rated by experts in 2006, 21 were “probably” or “certainly” discredited. Only five were deemed either “not at all” or “unlikely” discredited, according to a Professional Psychology: Research and Practice article.

That’s a big risk for investors because as insurers move to reimburse only for outcomes and for evidence-based treatments, providers offering unproven treatments won’t get paid. Revenue projections that don’t take clinical evidence and due diligence into account may be grossly incorrect. Risk-based payment models already make up 20 percent of Medicare reimbursements, and the Department of Health and Human Services plans to increase that to over 50 percent by 2018. Medicaid and private insurers, too, are moving rapidly to outcome-dependent payments. At some point, we’ll see reimbursement clawbacks at SA providers that haven’t proven their value.

Private equity firms are growing more sophisticated in their behavioral health due diligence efforts, realizing that financial due diligence is helpful in looking backward to project potential future cash flow. What’s critical now is for these firms to perform prospective due diligence that encompasses culture, operations, future processes and, of course, future reimbursement scenarios.

The upside is that, in doing so, investors can not only avoid bad investments, but identify less-obvious good ones. New billing codes, for example, have recently been approved for reimbursement for the Screening, Brief Intervention and Referral to Treatment (SBIRT) practice. And the evolution of Medicare and Medicaid reimbursement is likely to create new investment opportunities in SA treatment and other behavioral health care for lower-income patients. Drug testing, too, can be a lucrative endeavor for SA treatment centers—provided they adhere closely to value-based best practices, as this area is being closely watched by the Office of Inspector General.

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