Contemplating the Highs and Lows of Our Investment Frenzy

Investment capital may be changing our field. Private equity and publicly traded companies are actively working with many of our leaders as mergers and acquisitions (M&A) proliferate. We could ultimately become a better funded healthcare specialty, or this could be a period of temporary gains for some. In any case, we will have to meet the demands of financiers along the way. Leadership will be tested.

A few lucky executives are thrilled to be selling, but where does that leave everyone else? We all want our field to be funded appropriately one day. Federal parity is the pathway there. It is feasible that this investment period could culminate in the full realization of parity for our field. After all, today’s deals are predicated on parity’s equitable funding. Might each deal be a step toward that vision?

Yet there are lows to consider as well. The executives guiding us through the challenges of growth and consolidation have tough jobs, and we must hope they serve all our stakeholders. It may be worth understanding the brutal demands our leadership will face before exploring any dreams for the future. Our leaders will face intense pressure from their public and private investors.

Meeting Investor Demands

Public companies have quarterly investor calls to review financial results. Executives know that the pressure to perform well is enormous, but they also must worry about how investors interpret those results. For example, Teladoc is a healthcare technology stock with broad behavioral capabilities. It exceeded profit and revenue expectations in Q4 of 2021. The response was negative.

The financial analysts did not like their “modest 2022 guidance,” despite positive signs with their 2 behavioral health units, BetterHelp and myStrength. Is this pressure to perform financially more intense than that in companies owned by private equity? Such thoughts evaporate upon realizing the big fees private equity companies collect and their speed in pursuing buyers for newly acquired entities.

Private equity firms typically collect a management fee (often 2%) and a performance fee (often 20%). Furthermore, these firms may recoup their initial capital investment directly from the entity being acquired. This places debt with the acquired company, making that company responsible for reducing the debt. Every deal is different, but equity companies seek a profitable sale in roughly 5 years.

How will profits be made by investors in our industry? Our salary structure is low, and our operations are not bloated with inefficiency. The hope resides in growth. We have massive unmet behavioral need in almost every insured population. Investors know that exponential growth of small profits can result in large gains. They typically acquire companies (“platform” companies) to build on for expansion.

A few years of M&A activity does not guarantee sustained long-term revenue. We could be left much the same after a round of profit taking. Yet this infusion of funding could do much more than fuel expansion. Might we be able to upgrade our products, services, and employee compensation? Might we gradually fund our companies to be on par with the rest of the healthcare industry?

A Vision Rooted in Parity

Dr. Tom Insel, leader of the National Institute of Mental Health (NIMH) for 13 years, recently acknowledged that he may have pursued the wrong priorities during his time in leadership there. He placed his hopes and most available funding in basic neuroscience. He now sees his underinvestment in clinical care as mistaken. Effective work by our clinical teams brings value today. The research he funded pays off tomorrow, possibly.

Dr Insel regrets that his research funding has not “yet benefited patients.” His pursuit of medical breakthroughs was understandable. Yet there are clinical breakthroughs every day. Consider people with schizophrenia who are fortunate enough to have comprehensive biopsychosocial treatment plans that are fully funded. So too the many distressed people finding access to needed resources.

There is a powerful alternative to Dr Insel’s vision for our field, namely, one rooted in parity. It benefits patients now and tomorrow. Our industry may be on a path to becoming wealthier—clinical needs are great, public attention is growing, and parity requires equitable funding of services. Today’s M&A activity hinges in large part on parity. Few would be willing to invest in our field without it.

It is time to rectify the historic underfunding of our field rooted in pre-parity underwriting. Let us remember our field became a healthcare specialty when payers could legally provide marginal coverage. The campaign for parity legislation was simple—it envisioned a healthcare specialty in which good care and good jobs were readily available.

Let us hope a newly constituted field emerges, but we cannot passively await that. Equitable funding is still an unrealized vision. Insurance reform was a start, our current investor frenzy may be a next step, but an equitable place at the healthcare table is only available to those who fight for it.

Ed Jones, PhD is currently with ERJ Consulting, LLC and previously served as President at ValueOptions and Chief Clinical Officer at PacifiCare Behavioral Health.

The views expressed in Perspectives are solely those of the author and do not necessarily reflect the views of Behavioral Healthcare Executive, the Psychiatry & Behavioral Health Learning Network, or other Network authors. Perspectives entries are not medical advice.