TCIV: Behavioral health demonstrates unique market dynamics

Healthcare merger and acquisition activity overall has remained steady for the past several years, however, the behavioral health segment has exhibited a slight slow down for 2016 and 2017. This and other interesting trends demonstrate the unique dynamics of the market niche.

“I don’t expect a booming fourth quarter,” said Dexter Braff, president of the Braff Group, speaking at the Treatment Center Investment and Valuation Retreat in Scottsdale on Tuesday. “We will probably not have a record-setting year in addiction and substance use disorder treatment deals.”

There are a number of reasons for the recent slow down, but it’s also worth noting that the deal volume for the year is still ahead of 2013 and years prior, as tracked by the Braff Group. One factor contributing to the trend is the fact that a number of serial buyers that were active in 2014 and 2015 are now at a stopping point in making acquisitions—or they’re being acquired themselves. A deal like that changes the dynamic and takes a buyer out of the market, said Braff.

“Private equity had a drop off, but most of that was in follow on deals,” he said. “But there are still platform deals being done in the high-end residential space, which means that private equity is still looking at making acquisitions of residential service providers whose reimbursement sources are predominantly out-of-network.”

The luxury residential segment is not dead from an acquisition standpoint. Buyers are more comfortable with the reimbursement shift toward in-network, figuring that it’s going to be a more gradual change rather than an immediate leap. Their response has become more measured.

Concerns about federal healthcare policy changes continue to affect the market to varying degrees, and larger systemwide models that aim to structure reimbursement with global payments instead of fee for service could bring the next iteration. For example, Braff predicts that emerging population health models will not necessarily include addiction treatment.

“We believe behavioral healthcare is so unique, and the expenses of treating people over long periods of time can be so high that no one will want to take addiction and put it under a broad population health program,” he said. “What addiction is likely to become is a carve out to per-member, per-month healthcare programs.”