Gary Herschman, Kevin Malone Discuss Private Equity’s Push into the Mental Health Space in Q&A with Dana Jacoby

Prior to COVID-19, private equity appetite for the mental and behavioral space already existed. How did COVID-19 affect private equity sentiment, especially as the broader culture started to reassess its view on mental health?

The number of behavioral health sector investor deals increased from 37 in 2019 to 43 in 2020. Given that there have been 39 completed transactions in 2021 through Q3, the total deal count for the sector will likely exceed 50 this year. At the same time, transaction value increased considerably from $481 million in 2019 to a staggering $1.2 billion in 2020. Moreover, other organizations that compile data on healthcare transaction activity including smaller regional deals, such as Bloomberg, show activity increasing from 48 in 2019 to 80 in 2020 to 100 through Q3 2021—and likely to top 130 deals by year’s end.

How does private equity view the mental health industry’s business model, particularly around capital efficiency for outpatient clinics?

As compared with other medical specialties, behavioral and mental health practices are fragmented and disjointed across all platforms. At the same time, unprecedented demand has inundated the sector. Patients seeking behavioral and mental health services range from those with chronic mental health needs to those experiencing depression and/or anxiety for the first time. Unfortunately, most practice infrastructure was ill prepared for the increased service volume, and the capital requirement to meet the additional patient demand was prohibitive. According to national telebehavioral and telemental health providers, the increased demand for mental health professionals has begun to reach the limits of the current supply of licensed providers. The scarcity of providers will further drive up operating expenses and potentially slow the rate of growth until the industry trains additional practitioners. Private equity views acute care, such as psychiatric hospitals and partial hospitalization programs, as operationally inefficient. In contrast, outpatient programs targeting specific conditions with evidence-based clinical models, such as programs tailored to autism and addiction, require less capital. Consequently, these models of behavioral and mental health are highly sought-after investor targets. The data demonstrates a higher transaction value for practices that implement tools such as telebehavioral and telemental health models that, comparatively, require lower capital and treat a higher volume of patients.