Payer Interest Drives Behavioral Health Consolidation

The consolidation of behavioral health will accelerate as payers deepen their involvement and become more industry-focused.

The last decade or so – accelerated by the coronavirus pandemic – has seen an influx of capital and professionalization in the fragmented behavioral health industry. But as behavioral health becomes increasingly relevant in the broader healthcare landscape, payers present a powerful force moving the space forward.

Over the past six to eight years in particular, payers have acted in tandem with investors to drive consolidation in the behavioral health sector, said Terry Hyman, managing partner at Northwood Healthcare Partners and senior adviser at Thomas H. Lee Partners, during a panel. at the Behavioral Health Business’ INVEST event.

“For payers, behavioral health was a bit of a red-haired son-in-law compared to traditional general medical or clinical care,” Hyman said. “Payers have increasingly tried to selectively support this process so that the best, well-run companies can help meet the challenges of supply and demand.”

As 2022 approaches, questions about consolidating behavioral health have been heightened by increased investment in mental health technologies and workforce issues, according to several senior executives.

Well-capitalized and highly professionalized operations compete with mom-and-pop operators at the market level, Hyman said. The former are likely to overtake the latter because they have the ability to partner with payers and gain access to this source of revenue and support. These payers, in turn, pressured their vendor partners to do more, inspiring new M&A activity.

“Payers are looking for, first, someone who handles it professionally; two, which can provide access because access is the big deal in all of these sub-segments; and the third is aid to navigation,” Hyman said.

Navigation is especially important in helping patients access the full continuum of care across settings and acuity levels, Hyman added.

Diversifying services and providing a continuum of care helps patients avoid more intensive and costly levels of care, including emergency departments and psychiatric hospitals. This is a key objective of payers.

Providers are able to do this by offering a continuum of care, Richard Clark, CEO of Odyssey Behavioral Health, said during the panel.

Founded in 2015, Odyssey Behavioral Health operates 12 residential treatment centers and 19 outpatient sites. Its three service categories are psychiatry, eating disorder treatment and outpatient services.

“Payers like to see that … you can move customers up and down your continuum, but you’re not moving them into high-cost processing environments,” Clark said. “These different verticals offer a range of services. Payers like that and I think it’s been [part of] our success.

Payers are increasingly moving towards value-based care arrangements. And as the industry matures and integrates better with the rest of the healthcare ecosystem, behavioral healthcare providers will be more accountable for the total cost of care for enrollees.

This further encourages the consolidation of behavioral health by encouraging operators to offer multiple levels and types of care in a single organization. In one case, Phoenix-based payer Banner University Health Plans set up its own ACO-like clinically integrated network, focused on behavioral health.

Payers see the industry differently

Lately, payers have taken more seriously the link between the impact of behavioral health on other aspects of health care. This is one of the main reasons the payer industry has decided to influence behavioral health where it can.

Before the pandemic, the proportion of emergency room visits nationwide for mental health diagnoses rose from 6.6% to 10.9% from 2007 to 2016, a study found. Another finds that people with personality disorders have a four times greater risk of being a recurrent ER user.

“I was in a meeting with one of the big payer behavioral health managers [who] said they needed to spend more money on behavioral health to address some of the downstream issues,” said John Peloquin, CEO of Discovery Behavioral Health, during the roundtable. “I almost jumped out of my chair because I’ve never heard a payer say that.

“I’ve never heard them consider tackling the behavioral elements to interrupt the downstream cost of emergency rooms and so on.”

There are indicators that behavioral health has deteriorated for years and suddenly worsened during the pandemic.

Payers also see behavioral health as a growing expense, Peloquin said, adding that payers are looking for ways to break out of a cycle of growing spending historically driven by the opioid epidemic and the COVID pandemic.

“You’ve heard of value-based care, you hear a lot of different types of reimbursement models,” Peloquin said. “It all comes down to…the quality of the supplier.”

Consolidation of behavioral health impacted by staffing

The forces driving the consolidation of behavioral health within markets belie the desperate need for the collective behavioral health industry to expand to meet the increased demand for care.

Odyssey Behavioral Health and Discovery Behavioral Health, while active and opportunistic acquirers, are largely focused on organic growth and de novo expansion, their respective CEOs said.

“We’re a first type of de novo operation — we always have been,” Peloquin said, adding that the two or three acquisitions Discovery Behavioral Health makes in a year are strategically important. “Sometimes when I see an opportunity to enter [a market] it could come first from an acquisition.

Peloquin gave the example of Discovery acquiring a psychiatry practice in Kansas, then opening a de novo treatment center for eating disorders.

In August, Discovery Behavioral Health expanded into Pennsylvania with the acquisition of Brookdale Premiere Addiction Recovery, the company’s 15th state market.

Odyssey Behavioral Health has been leaning towards organic growth a lot more lately, Clark said, “because of the market and because the opportunities…are not as abundant as we would like.”

The organization opens 80 to 100 organic beds and 9 to 10 outpatient sites per year. In the outpatient area, Odyssey Behavioral Health only offers Partial Hospitalization Programs (PHP) and Intensive Outpatient Programs (IOP).

However, personnel issues hampered organic growth.

“Over the past 24 months, I’ve had every de novo that we’ve started at some level of modified census development due to staffing shortfalls,” Peloquin said.

Across all segments and at the market level, Hyman said the biggest headwind facing the behavioral health industry is finding and retaining vendors.

Another major staffing challenge is finding experienced leaders to manage facilities and programs, Clark said. Odyssey has an executive leadership development program to develop its own managers. He added that while he and Peloquin were both former managers at Acadia Healthcare Co. Inc., based in Franklin, Tenn. (Nasdaq: ACHC), he observed a massive turnover of managers.

“One of the things I did there was renovate the CEO training program and it paid huge dividends in bringing people into the role and developing them into seasoned CEOs over time” , said Clark.

Acadia Healthcare is the nation’s largest pure behavioral healthcare provider with 239 sites that operate approximately 10,600 beds and care for 70,000 patients daily.