Understanding the Opportunities and Challenges of Investing in Behavioral Health Services

A 2018 survey by the Substance Abuse and Mental Health Services Administration (SAMHSA) found that approximately one in five adults (47.6 million) in the U.S. had experienced a mental illness in the past year, and 17.7 million suffered from a major depressive episode. The need for behavioral health services has accelerated significantly in the United States.  
Considering the shortage of behavioral health services and the growing availability of behavioral health coverage from health insurance providers, as well as the critical and often chronic nature of the needs they address, businesses related to behavioral health–a category encompassing various clinics and professional groups that help people suffering from a host of challenges, may seem like a gainful opportunity for investors. However, behavioral health service is a complex sector where success relies on specialized knowledge and regulatory expertise, so it’s important to understand the potential challenges and complications in that space before investing.
A growing market
Demand for behavioral health services has grown rapidly over the past decade, and market observers see a wide range of opportunities ahead for both organic and inorganic growth. On the organic side, individuals, insurers and policymakers increasingly recognize the value and importance of behavioral health as a component of overall health. On the inorganic side, many of the fastest-growing clinics and services see opportunities for regional and national consolidation ahead.
Many of the providers pursuing a consolidation strategy were established in 2008, when provisions included within the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA) began to require private insurers to reimburse patients for a variety of behavioral health needs. Specialists saw an opportunity, and they began forming clinics to care for patients with one or more of these needs. A decade later, many of these firms have matured but are still growing rapidly, and they are now looking for capital or strategic partners to expand their catchment area.
Autism services – a robust subcategory
Autism services have grown significantly. Demand for Applied Behavior Analysis (ABA) services has increased markedly since 2008, spurred both by greater availability of insurance coverage and a growth in unsatisfied demand. 
The number of children diagnosed on the autism spectrum rose from approximately one in 150 in 2002 to one in 59 as of 2014, according to the CDC. Researchers have also found that long-term outcomes improve when treatment begins earlier. So, health regulators have encouraged the growth of ABA clinics to service this population into adulthood. However, supply remains limited, partly due to a lack of trained Board-Certified Behavior Analysts (BCBA).
Many local providers offer services regionally, and some providers, such as the Center for Autism and Related Disorders (CARD), have expanded nationally.  Yet, the ABA sector remains fragmented and requires more consolidation.
Due diligence concerns
From a due diligence perspective, healthcare is a highly regulated sector with very complex pricing and payment mechanisms, and cash flows should be examined carefully. Reported revenue may not be supported by actual cash collections. Prospective investors need a deep understanding of the reimbursement trends and related revenue recognition for the business’ specialty.
Furthermore, before making a bid, a would-be buyer should assess the sustainability of the business’ earnings, paying close attention to the historical operating results, as well as the pro forma impact of new payor contracts, new geographies, changes in the location footprint, clinical leverage models and other recent initiatives undertaken by the business to enhance operations.
Investors can benefit from hiring a diligence advisor with experience in the sector and knowledge of key areas including reimbursement, handling of protected health information (PHI), clinical operational models and more.

The bigger picture
Today, many more people suffering from behavioral health issues have access to a broader spectrum of care and they can do so in a more cost-effective way as payers are expanding coverage. And while the investment in this sector carries potential risks of greater state intervention in the future, it also creates tremendous opportunity – opportunity for behavioral health patients to benefit from the care resulting from a higher level of investment in these critical services.