How to remodel your business | Behavioral Healthcare Executive Skip to content Skip to navigation

How to remodel your business

May 7, 2018
by Julie Miller, Editor in Chief
| Reprints

There’s no doubt that the business of behavioral health is changing. What was once a cottage industry has transformed into an investment opportunity for entrepreneurs and financiers alike. Not unlike the situation witnessed by primary care providers a decade ago, behavioral health organizations are considering mergers, acquisitions and ample opportunities to sell the practices that many have built with their own two hands.

The emerging, lesser-known options for structuring an enterprise can have treatment center owners wondering if it’s time for a change. Even more so, many are wondering if change is even a good thing.

“The treatment field used to be made up of boutique programs—family-owned and operated and closely held small businesses—and about 10 years ago, behavioral health companies started gobbling up the crown jewels,” says Jane Eigner Mintz, MA, LPC, BCPC, CIP, chief clinical strategist and CEO of Realife Intervention Solutions.

Mintz says the tug of war between profitability sought by strategic owners and mission fulfillment sought by family owners has been detrimental to the industry overall. The business lens and the clinical lens provide two truly different perspectives.

She’s concerned about a cultural shift that puts business ahead of clinical quality because it not only hurts patients, it leads to a lack of reverence for the history of the field. Established treatment centers have been doing life-saving work—in some cases for a century or more—and they now compete with corporate players that have recently arrived to capitalize on market opportunity.

However, private equity (PE) has a vested interest in building the best of the best, and maintaining quality is typically seen as a competitive advantage.

“Where those providers have clinical excellence, that’s where they’re going to win,” says Patrick Pilch, managing director and national leader of the BDO Center for Healthcare Excellence & Innovation. “And that’s certainly where the PE investors are going to go.”

Investors circle

The fragmented and undercapitalized behavioral health market represents about $35 billion of the $3.3 trillion U.S. healthcare system, and many successful facility owners have been approached by PE firms looking for acquisitions. PE is often seeking to make initial platform deals or buy up smaller providers that serve as complementary add-ons to the portfolio. In most cases, the goal for PE transactions is to build up an enterprise with scale.

And capital investment leads to accelerated expansion.

“The big players are going to get bigger,” says Pilch. “Even then, if you’re talking about two years from now, it’s still going to be surprisingly fragmented. It will take time to do the rollup that’s required to get to scale.”

As one example of rapid growth, BayMark Health Services now holds 167 programs in 26 states and in Canada. BayMark was formed just three years ago from the merger of two medication assisted treatment outfits: BAART Programs—launched in 1977 by a San Francisco family—and MedMark Treatment Centers—a primary care provider that expanded into addiction treatment in 2006. BayMark has been backed by Webster Capital since 2015.

Beyond an outright sale to private equity, which remains the biggest deal opportunity according to Pilch, there are some lesser-known business structures that behavioral health owners might consider. While far from being considered trends, a few unique options are emerging.

 

1. Management services organizations

Some family-owned treatment centers might reach a point where they begin to feel a little too successful. As the logistics of running a booming business overtake mission-driven work, owners might consider offloading the administrative burdens to an outsourced partner. Management services organization (MSOs) could be such partners.

MSOs have a fresh foothold in other healthcare segments and in time could represent an opportunity for behavioral health enterprises as well.

For example, in 1994, a team of physicians formed Network Medical Management, and it has gone on to become one of the largest MSOs in the country, handling everything from case management to accounting to marketing, while the clinicians remain solely in charge of care delivery.

Pilch says he fully expects MSOs to begin surfacing in behavioral health in the next year.

“Where the provision of care is great—you’ve got a great clinical enterprise but the back office is not as strong, not as efficient—that’s where it’s ripe for opportunity,” he says.

If a collection of 10 operators would get together to combine their administrative functions, for example, they could have enough scale to separate the back office from the clinical side. Even a not-for-profit provider could structure a foundation model with a for-profit MSO, Pilch says.

“If these MSOs come in, I’d like to see if they could take the back-end business away and put more money into clinical service or clinical training because that’s where we’re letting people down today,” Mintz says.

 

2. Employee stock ownership plans

Many small-business owners want to see their corporate vision continue after they’ve retired. A trust might provide an option to maintain an owner’s legacy.

Pages

The Treatment Center Investment & Valuation Retreat brings together owners and senior executives from the addiction treatment and recovery community to meet with key members of the investment and financial community for an exclusive three-day educational, business, and networking event.

December 10-12, 2018 | Scottsdale, AZ

Topics