Opinion

Last updated: 27th Jul 2010

The recent $2 billion acquisition of Psychiatric Solutions by Universal Health Services illustrates the current high level of strategic interest in the behavioral and mental health sector. Reports indicate that HCA, which is owned by Bain Capital, had been courting Psychiatric Solutions as well, which was the largest pure-play public behavioral health company in the U.S. Psychiatric solutions has itself been a very active acquirer of smaller behavioral health businesses over the past several years.

The U.S. for-profit mental health and substance abuse industry has been growing in response to both an increased awareness of the diseases, along with a growing de-stigmatization of treatment. It is estimated that in 2010 the industry will generate roughly $11.9 billion in revenue, which will be a 6.4% increase over 2009. Over the next five years, industry revenue is forecasted to grow by 4.1% annually with revenue in 2015 projected between $14 and $15 billion.

Demand for behavioral health services can be determined by the affordability of care, the incidence of psychiatric and substance abuse disorders in the general public, cultural acceptance of treatment and the availability of facilities and medication. These macro trends are coupled with the recent enactment by the U.S. Congress of the Patient Protection and Affordable Care Act which extends mental health protections of the 2008 Mental Health Parity and Addiction Equity Act. The bill allows most Americans who are now uninsured to become eligible to receive coverage for behavioral treatment. This is expected to increase demand for care among the 67% of U.S. adults and 80% of children needing mental health care who do not receive care.

Over the next five years (to 2015), employment in the sector as well as wages are expected to rise. These expected costs will be accompanied by a projected continuation of the deterioration of the payor mix, with a larger percentage of revenue being derived from Medicare, Medicaid, and government sources (which typically have lower reimbursement rates than private insurance). But even in the face of rising costs, the industry-wide profit is expected to increase moderately by 5.5% by 2015. The increased profit margin will be achieved through overall higher reimbursement rates for public and private insurance as well as improved cost management.

Mental health and substance abuse treatment services are delivered in a variety of settings. Residential care for the mentally handicapped, patients with autism spectrum disorders, and patients with psychiatric or neurological conditions, is around-the-clock care provided to patients living in the facility. These facilities can also include group homes (or halfway houses) and centers for the rehabilitation of substance abusers, which often include the supply of methadone for reducing opiate dependency. Outpatient facilities deliver similar services, but treatment is less intensive, or is primarily directed toward follow up care and reinforcement.

There has been an increasing rate of closure of large, government-operated facilities in the U.S., which has reduced average facility size. About 40% of people discharged from these facilities have been placed in group homes, 15% in semi-independent facilities, and the rest either in large private facilities or with relatives. The trend has been toward smaller, more cost-effective facilities.

Additionally, as people with mental disabilities live longer, they will require services longer or their caregivers will age and be unable to continue to care for them. These patients will increasingly require outside supervision. Both of these trends are expected to drive market growth worldwide.

Outside the U.S., over the past several years there has been a high level of interest by private equity firms in the private behavioral and mental health services industry, driven by local domestic trends. The space is quite active particularly in the U.K. (including private equity-owned companies like Four Seasons, Craegmoor, and The Priory Group) and in Scandinavia (including Solhagagruppen and Svenska Specialistpsykiatrigruppen).

Gregg Blake
Managing Partner
Brocair Partners