Behavioral Health: From Stigma to Status Quo

Key Takeaways:

  • Increasing social acceptance and reimbursement parity are driving strong demand for a wide range of behavioral health services, including the five key segments profiled below.
  • These five segments can provide plentiful opportunities for buyers and investors that can provide a broad continuum of care, a high level of professionalization and evidence of strong outcomes. 
  • The key success factors described below can help buyers and investors tap into the growth potential of the behavioral health market while improving the lives of patients.

There is an ongoing de-stigmatization of behavioral health issues underway, driving surging demand for a range of related services. This trend has its roots in legislative shifts that have increased funding for these pervasive and challenging illnesses. It has been bolstered by the many personal stories of professional athletes, actors and musicians seeking treatment for common behavioral health conditions. And as recognition of behavioral health issues grows, so do the number of diagnoses and the frequency of coverage by insurers.

These dynamics are attracting strong interest in the behavioral health segment from strategic acquirers and private equity investors. Prospects are especially strong for businesses that can provide a broad continuum of care, a high level of professionalization and evidence of strong outcomes. 

In this report, Harris Williams Managing Director James Clark and Director Whit Knier, both in the firm’s Healthcare & Life Sciences (HCLS) Group, discuss the opportunities for acquirers and investors in behavioral health, and key success factors in five segments: acute psychiatric care, substance use disorders, eating disorders, autism, and intellectual or developmental disabilities.




Acute Psychiatric Care


Key Success Factors

  • Possessing clinical expertise
  • Managing large facilities
  • Choosing locations
  • Creating referral networks

Acute psychiatric care, consisting of inpatient psychiatric hospitals, is the foundation of the behavioral health landscape. “It is probably the most mature area of behavioral health,” says Knier, “although there is still a lot of runway left in the segment.”

Today’s market is characterized by facilities with high utilization and steady demand. Revenue comes from a mix of Medicare, Medicaid and commercial insurance and, with short lengths of stay being typical, the risk associated with reimbursement is lower than other health segments. 

The trend toward government de-institutionalization of mental health patients that began decades ago led to the closing of many state-run psychiatric hospitals. Since that shift, substantial consolidation has occurred. Two big public companies, Acadia and UHS, have played a leading role in this consolidation.

The segment also features new, private equity-backed startups that are building inpatient facilities from the ground up. Such groups typically target under-bedded markets to build new psychiatric hospitals to satisfy unmet demand, particularly where there are hospital systems in the market open to partnering.

Psychiatric facilities are a common entry point in the broader continuum of care for the behavioral services population and can become the foundation for larger platforms. Says Knier: “A patient may be referred to a psychiatric facility for an acute issue and short length of stay, and once the acute episode is stabilized and doctors make an initial diagnosis, it often leads to a referral to a neighboring facility. Increasingly, these networks are all under one brand or corporate entity.”

“We’ve definitely seen businesses in this segment start to adopt a continuum of care or step-down approach,” adds Clark, “from inpatient acute care down to residential care or care in a community setting.”           

While acute psychiatric care is a segment with a large degree of consolidation, Knier believes there are still very attractive assets to be found: “There are a handful of private equity-backed platforms today. Those likely to be coming to market in the next 12 to 24 months should be very attractive to private equity and strategic acquirers seeking a presence in the market.”

Key qualifications that help acquirers and investors be successful in the acute psychiatric care segment include, first and foremost, clinical expertise. As in an emergency room, clinicians must be able to triage quickly and effectively, and move individuals from crisis to stability in a short time of stay. 

Facilities expertise is also critical, as there are substantial capital requirements for those considering building a hospital from the ground up. In addition, the ability to build relationships with other health care players and community support organizations is essential to maintaining the very important referral network on which these facilities depend. This may include first responders or a hospital emergency room.

In all cases, says Knier, “it requires a level of sophistication to demonstrate to the acute care hospitals you have the capabilities and value to become a primary referral recipient.”

Substance Use Disorder


Key Success Factors

  • Demonstrating positive clinical outcomes
  • Working within payer networks
  • Marketing to clinicians

Substance use disorder (SUD) spans alcohol and drug abuse, with a growing focus on opioids. The care continuum extends from acute medical care (initial detoxification and medical stabilization) to outpatient counseling.  

It is a very fragmented segment, with a proliferation of small-scale providers at a wide range of sophistication. As such, there is substantial opportunity to professionalize this market and build a continuum of care from detoxification to residential treatment to outpatient counseling, which continually steps down the hours and intensity of treatment per week. Indeed, recent recognition of substance abuse as a chronic condition favors organizations providing a care continuum, which can help patients fight the disease on a long-term basis while capturing the full patient value stream through the course of care.

Such a business model is also responsive to payers that prefer to begin substance abuse treatment with less expensive outpatient therapy and move to more intensive treatment if needed. This preference is increasingly common, says Knier, given the fundamental push toward increased scrutiny of results and more efficient health spending. As patients seek the providers that are driving the best outcomes, payers are narrowing their networks to a high-quality group of providers and reaching contractual relationships with those demonstrating strong clinical results.

As part of this effort, payers are also improving their tracking of providers’ recidivism rates, which, in substance abuse, can be high and therefore expensive. Providers that become part of payer networks benefit from an efficient, high-volume referral network that fuels more efficient, highly utilized operations.

“Those operators that demonstrate strong credentials, rigorous clinical protocols and evidence-based treatment have the opportunity to negotiate contracts with payers that result in increased referral volume and guaranteed rates,” says Clark. This requires transparency in tracking and reporting clinical outcomes, as well as contract negotiation skills. 

Another key skill: marketing directly to clinicians. “Spending money on more targeted, doctor-focused marketing can yield more, higher-quality new patients than more expensive mass marketing,” says Knier.

Eating Disorders


Key Success Factors

  • Possessing clinical expertise
  • Demonstrating positive outcomes
  • Marketing to clinicians
  • Creating referral networks

In several ways, the eating disorder segment differs from other areas of behavioral health. For one thing, it is notably smaller than other segments, and its supply-demand dynamic is more balanced. Perhaps most importantly, while many other behavioral health segments lack agreed-upon clinical outcomes or measurements, success against an eating disorder can be clearly documented with a range of biometric variables. This allows high-quality operators to differentiate themselves on clinical outcomes, which has led to a more rapid segment consolidation and a high level of professionalism.

With real clinical data to work from, it is more straightforward for both patients and payers to identify good operators and appropriate lengths of stay than in other segments, which, similar to what is occurring in substance use disorders, has furthered the trend toward payers building in-network relationships with providers. With all of these dynamics at play, investors and acquirers wanting to be part of this segment have to think creatively about the total addressable market (which commonly spans anorexia nervosa, bulimia nervosa and binge eating disorder) and strategies for expansion and growth.

There are three areas where deep expertise can differentiate operators in this segment: quality of clinical care, a focus on outcomes and clinical marketing capability. Anorexia nervosa has the highest mortality rate of any behavioral health disorder, so operators providing acute care need deep clinical expertise from both the medical and mental health fields. That is why, in part, there are fewer and larger operators in high-acuity care, with many buyers and investors choosing instead to focus on post-acute-care residential settings. 

Being outcome-centered is also differentiating. As patients, families, referral sources and payers look to outcomes as a way of differentiating operators, the ability to produce, track and market outcomes will make successful operators stand out. And finally, the ability to build a referral network is paramount to success due to the narrower source of referrals than that found in other segments. In particular, because operators rely heavily on referrals from physicians, strong clinical professional marketing capabilities are essential.



Key Success Factors

  • Possessing educational and/or psychological expertise
  • Recruiting and managing ABA-trained therapists
  • Demonstrating positive outcomes

According to the Centers for Disease Control & Prevention, 1 in 59 U.S. children were diagnosed with autism spectrum disorder (ASD) by age 8 in 2014, a 15 percent increase over 2012.Such rapid growth in diagnoses has fostered equally robust growth among service providers. Growth is also supported by aggressive lobbying by patient advocacy organizations for expansion of coverage. Those efforts have paid off: Recent regulatory changes have led 48 U.S. states to mandate autism coverage.

No wonder, then, that autism is the least consolidated and least mature of the profiled segments in the behavioral health sector. It comprises a number of locally owned and operated businesses as well as some of regional or national scale, which all contributes to the segment being the most recently emergent business opportunity.

“There’s been de-stigmatization, greater awareness and greater diagnosis,” says Knier. “There’s advocacy and real change on the regulatory side, and now there’s a funding source. As a result, there’s been a growth in providers. There are a lot of positive fundamentals in this young market, and that is attracting acquirers and investors.”

“It’s a pretty promising and exciting space,” adds Clark. “There’s been an aggressive inflow of dollars to fund platforms, pursue tuck-ins and open new clinics.”

In comparison to other behavioral health segments, autism tends to attract buyers and investors with experience in education or psychology. The care continuum is another difference. Unlike eating disorder or substance abuse patients, who typically receive services for 30 to 120 days, autism patients may be under treatment for years, usually beginning early in life. Services typically focus on early intervention with the patient as well as on teaching primary caregivers to help their children.

Then, as patients age, education becomes a core component of youth and adolescent therapy. The subset of patients who are unable to cope in a mainstream environment may require different services, including housing, as they become adults.

More than in any other behavioral health segment, experience in the education sector is a critical attribute for operators, as is the ability to recruit and manage those with experience in Applied Behavioral Analysis (ABA) therapy. Also, like other sectors, differentiating on outcomes will be increasingly important as the segment matures.

Intellectual or Developmental Disabilities


Key Success Factors

  • Successfully running lower-margin operations
  • Professionalizing multi-site healthcare businesses
  • Providing “one-call” solutions to managed care companies
  • Managing complex regulatory environments

Individuals with intellectual or developmental disabilities (IDD) are characterized by significant limitations in intellectual functioning and adaptive behavior, which spans many everyday social and practical skills. Some may not be able to care for themselves. Often, businesses serving this population go into the home to assist patients and their families or operate community-based homes providing 24/7 care. 

Services are primarily reimbursed by Medicaid, with very limited commercial insurance coverage. Two organizations – Civitas and ResCare – are national in footprint and have achieved that scale through acquisitions. The remaining market is represented by regional or less sophisticated providers. “Barriers to entry are low,” notes Clark. “Individuals can purchase one or more group homes, complete the required paperwork, hire staff and begin caregiving. That has led to a highly fragmented market.”    

It is also a segment seen as providing strong value to buyers and investors. “You can enter the segment, back a good operator, and be active and successful on the acquisition side,” says Clark. “But because of the reimbursement dynamic, this segment attracts the health care black belt more than the health care tourist. If you have prior experience with multisite health care and government reimbursement, and have professionalized other health care businesses, this may be a good segment for you.” 

Knier agrees: “It’s a big market, but it’s kind of a value play in some ways. It’s the entry point where you don’t have to pay 15 to 20 times EBITDA to get into the overall behavioral health market.”

Another dynamic providing growth opportunity is the shift toward the managed care model, with state governments authorizing a managed care company to oversee IDD management. This trend offers buyers and investors the opportunity to build a breadth of IDD care offerings that would appeal to managed care companies. 

“There’s an opportunity there to gain scale, and with a level of sophistication, contract with those managed care plans to run multiple operations,” says Knier. “The critical skill here is being easy to deal with and being efficient. The managed care company doesn’t want dozens of providers – they want a ‘one-call’ solution.” 

Given that Medicaid is the primary reimbursement source for IDD services, which tend to be low-margin, successful operators must run highly efficient operations. They must also be adept at managing a low-wage, high-turnover labor pool. Regulatory expertise is important as well: With a government-reimbursed business model, organizations can reduce risk by having strong regulatory and government affairs skills onboard. As Knier explains, regulations vary by state and even by county, so regulatory skills become even more critical when an organization is tackling the complexity of operating a regional or national business.


Changes in regulations and the growing parity of behavioral health reimbursement are fueling demand for a broad spectrum of behavioral health services. Many segments are underserved, providing plentiful opportunities, particularly for buyers and investors that can provide a broad continuum of care, a high level of professionalization and evidence of strong outcomes. With the right expertise, acquirers and investors can tap into the growth potential in this market while improving the lives of patients grappling with a range of challenging behavioral health issues.

Published September 2018


1. Source: IBIS World, 2012 Behavioral Health, United States Report from SAMHSA, National Institute on Drug Abuse, Coleman Institute