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Castlewood  behavioral health
Castlewood expanded to 16 beds after being acquired by Trinity Hunt.

Investors eye behavioral health

Market sees growth as more payers cover treatment

By Beth Kutscher
Posted: February 15, 2013 - 12:01 am ET

At Castlewood Treatment Center, patients with eating disorders receive intensive, one-on-one therapy at three estate-like residential campuses nestled in the hills of St. Louis.

The daily rate for an inpatient stay runs about $1,100, a once-staggering amount to treat conditions like anorexia, bulimia and binge eating, which require 24-hour care.

Yet thanks to the 2008 Mental Health Parity and Addiction Equity Act, not only are more clients successfully lobbying their insurance carriers for reimbursement, but the treatment centers themselves are seeing a changing business environment.

As payers have started to cover more behavioral-health treatments, the sector is getting another look from financial investors who see a fast-growing, high-performing market.

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The Patient Protection and Affordable Care Act also is spurring investor interest. The healthcare reform law requires small group and individual plans to offer coverage for mental illness. The law also is expanding the overall number of people with insurance, including the key at-risk group of young adults.

Hunter Peterson, a partner at Trinity Hunt Partners, which has made three behavioral-health acquisitions since 2008, estimated that the market has become a “massive industry” worth tens of billions of dollars.

Peterson said the number of covered lives is growing more rapidly than the availability of services to treat them—creating a high-margin growth business. But dealing with insurers has also created new headaches, such as a need for facilities to have strong cash flow when payment may come in 30 to 90 days after services are rendered.

And to get coverage from health plans, treatment centers need to expand their services and “look and feel more like a hospital and less like a very nice house,” Peterson said.

All of that taken together means scale and business acumen are increasingly important and are driving consolidation, he said. “The bigger players will get bigger and the smaller players will go away.”

While Castlewood 10 years ago was largely a cash business, just 5% of its clients now pay out-of-pocket. The change in payer mix means the center needs more back-office staff and upgraded IT systems to work with insurers.

Trinity Hunt acquired Castlewood in 2008, and Executive Director Nancy Albus said that the private equity firm has allowed the treatment center to expand from 10 beds to 16, and add 10 additional day-treatment spots. “Our intake office doubled; our marketing office doubled,” she said. “Having a business infrastructure was really key.”

Centers that treat eating disorders in particular have been garnering interest from investors.

CRC Health Group, which operates about 140 behavioral-health facilities and has been backed by private equity firm Bain Capital Partners since 2006, has been a longtime consolidator in the behavioral-health industry.

But over the last six to nine months, CRC Health CEO Andrew Eckert said the group has seen a “flurry of activity” around eating disorder centers. “We’ve certainly seen very favorable parameters,” he said, citing long lengths of stay, availability of reimbursement and what is unfortunately a growing disorder.

“The demand really has been triggered by healthcare reform,” he said, as well as by what he called the “failure to launch” generation: young adults who now have insurance coverage under their parents’ plans until age 26. “The market has changed,” Eckert said. “Price expectations have certainly gone up.”

Although investors are also looking at other behavioral-health conditions—particularly autism, an area of significant unmet need as children get older and become adults—Eckert noted that he hasn’t yet seen a similar flow of reimbursement dollars.

Peterson said the high margins and quick growth opportunities have made the behavioral-health space more appealing to private equity firms than strategic buyers, such as other health systems.

Yet Franklin, Tenn.-based Acadia Healthcare, one of the largest behavioral-health companies, has seen the same macro-trends catapult it to a tremendous run in the stock market over the past 14 months, when its share price more than doubled.

“The inpatient behavioral space has been pretty strong over the past 10 years,” said Brent Turner, the company’s president, who cited “continuing awareness and positive awareness” of mental disorders for the increased interest.

While about half of Acadia’s patients were on Medicaid even before the Affordable Care Act was passed, Turner said, the expansion of Medicaid programs will lead to more individuals with coverage.

He also noted that treatment centers are finding that size and scale are increasingly important to competing in the industry. “There’s more to being successful than just being in the space,” Turner said. “If you want to be bigger, you need to be in more places.”

At Castlewood, Albus noted that the business has been getting more competitive, with new centers seemingly opening up on a monthly basis. But Trinity Hunt’s investment has allowed it to acquire new referral sources and certifications, as well as more name recognition, she said. “It allowed us to feel like we were really cemented in a changing environment.”

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