With a greater awareness of the need for behavioral health services and parity initiatives in place to bolster funding, behavioral health M&A has rocketed over the past five years and has become the most sought-after sector in health care services M&A. While residential addictions and substance abuse was the initial focal point, broad acquisition interest has emerged in non-residential, community based programs, medication assisted treatment, autism spectrum disorders, individuals with developmental disabilities, and mental health – notably telepsychiatry. With the realization that patient needs change over the course of treatment, we anticipate more cross-sector activity as providers create programs and facilities that support seamless continuity of care.
Although modestly down from 2015, 2016 was another year of elevated activity in behavioral health M&A. The bulk of the decline was attributable to a 30% fall-off in deal volume in the intellectual and developmental disabilities sub-segment, despite risk-return fundamentals that were largely unchanged for most of the year. More on I/DD below.
Private equity continues to exert substantial influence in behavioral health M&A. Perhaps most notable, after more than doubling the previous record for market-entry, platform investments in 2015, there was only a modest fall-off of such activity in 2016. As we might anticipate after a long run of platform investments, the number of follow-on deals continues to rise, setting a new record of 49 transactions in 2016 – the seventh consecutive year of gains.
Demonstrating extraordinary staying power, the addictions and substance abuse sub-segment recorded its sixth consecutive year of record breaking activity. As we predicted in 2015, transaction volume in addictions treatment is slowly shifting from high-end, residential programs, toward lower cost facilities and non-residential, community based services. No surprise, then, that non-residential M&A activity nearly doubled year over year (11 in 2016 vs. 6 in 2015).
While private equity has been a major player across the behavioral health spectrum, it has been most active in addictions and substance abuse treatment. With 42 investments combined (platform and follow-on), PE deal flow in 2016 eclipsed the previous record of 27 – set last year – by 56%. Platform transactions remained unchanged, keeping pace with the record set in 2015. All of the gains, then, came from record follow-on deal flow which surged 88% in 2016.
For only the second time since 2007, private equity accounted for more than 50% of the M&A activity in addictions treatment. Moreover, it accounted for a whopping 70% of deal flow in 2016.
As private, insurance, and government payors seek to manage their spend in treating an ever growing number of patients with substance use disorders, we have anticipated a rise in non-residential transaction activity. If we factor out 2012 (which the data clearly suggests was an anomaly), 2016 marked the second consecutive year of rising deal flow for providers in this lower cost setting.
It wasn’t until 2013 that buyers began to really recognize the growth opportunities in medication assisted treatment. With private equity (again) first out of the gate, transaction volumes continue to rise steadily. We expect this trend to continue – and perhaps accelerate – as more funds are directed to opioid treatment – perhaps disproportionately to MAT – given it’s relative low cost and documented outcomes.
It’s a tale of two segments in intellectual and developmental disabilities. While deal making in the autism space reached a new record high in 2016, non-autism activity (largely group homes) fell-off substantially vs. 2015. The good news in non-autism, however, is that the drop came after posting extraordinary results in 2015. Accordingly, it may be due more to a timing issue vs. any fundamental change in market interest.
After a precipitous fall in 2013, 2016 marked the third consecutive year of elevated activity in mental health. Although still below the peak set in 2012, at 30 plus transactions 3 years running, the segment is still a significant force in behavioral health M&A.
Transaction activity in at risk youth remains the lone soft spot in behavioral health M&A. Although interest in the segment took at hit after a spate of bad press several years ago, our sense is that its failure to rebound has less to do with lingering damage, and more to do with real surges in interest and opportunity in other corners of behavioral health.