After years of declines, lengths of stay at the nation's behavioral healthcare hospitals and facilities have begun to increase, along with patient admissions, reimbursement and occupancy rates that are now approaching historic levels.
Given that demand for a full continuum of behavioral healthcare services remains strong, according to recent industry survey data, both not-for-profit and for-profit providers are acquiring and opening mental health facilities with renewed fervor.
"There is increased sensitivity to these diagnoses," said Paul Gilbert, a lawyer with Waller Lansden Dortch & Davis, Nashville, who specializes in psychiatric hospital acquisitions and divestitures. "Primary-care physicians and specialists are diagnosing mental illness at a higher rate and people are seeking treatment at a higher rate, and those are helpful trends for providers."
Among those who have benefited are large-scale for-profit psychiatric providers such as Nashville-based Ardent Health Services and Franklin, Tenn.-based Psychiatric Solutions, which raised a combined total of roughly $590 million to fund acquisitions and growth in 2003, Gilbert said.
He said these investments seem to represent a burgeoning trend rather than an industry anomaly. Two established venture capital funds have also recently approached him expressing interest in getting into the psychiatric hospital business, Gilbert said. "It's extraordinary, the kind of attention the sector is getting," he said.
The nation's largest psychiatric services provider, Psychiatric Solutions, reported earlier this month that revenue for the fourth quarter of 2003 grew 181% to $100.6 million from $35 million in the same period last year.
Net income was $2.3 million, compared with $2.4 million for the fourth quarter of 2002. Revenue for 2003 increased 158% to $293.6 million from $113.9 million in 2002.
"The foundation of our confidence in our prospects for profitable growth lies in the very tangible need for our services in a growing industry," said Joey Jacobs, Psychiatric Solutions' chairman, president and chief executive officer, in an earnings conference call earlier this month.
Lang Aston, senior vice president of healthcare banking at Lehman Bros. in Nashville, said Psychiatric Solutions, like a number of psychiatric hospital companies, has positioned itself and done well in growing markets where there has been a lack of availability of behavioral health services.
"There will be room for other players, but there's a real operating advantage with Psychiatric Solutions, Universal Health Services and other multifacility operators that know how to acquire and run these facilities," Aston said. "What hasn't changed since the 1990s is that, unfortunately, society requires that we have these facilities, and on an acute basis there are few places to go," he added.
Nearly 300 inpatient behavioral healthcare facilities, accounting for more than 40% of available beds, were closed during the 1990s as Medicaid funding dried up and states began closing public mental health hospitals. Patients were steered toward treatment options in the private sector.
"When you take that much supply out of the equation and you have demand that continues to increase, that's always a good dynamic to have," said James Forbes, managing director of healthcare investment banking at Merrill Lynch & Co.
That trend is one reason for the strengthening of both inpatient and community psychiatric health services, said Mark Covall, executive director for the National Association of Psychiatric Health Systems, or NAPHS.
A survey released last month by the NAPHS, which used data from 171 facilities associated with roughly 54% of its 114 member systems, shows a new vibrancy and development of services of care far beyond traditional hospitals, he said. Educational and housing services, psychiatric rehabilitation, case management, substance abuse services, emergency walk-in services and mobile treatment teams are just some of the specialty resources that behavioral health providers are developing to meet the growing needs of psychiatric patients.
"There has been more pressure to develop non-24-hour services," Covall said. "Alternatives were needed as payers wanted to move patients through or out of hospitals, and that dampened admissions to existing facilities and created financial difficulties resulting in many psychiatric hospitals consolidating or closing."
President Bush's 2001 signing of an executive order supporting community-based services and programs for individuals with disabilities-including mental health-also called for increased resources in the nation's mental health services delivery system.
According to the NAPHS data, admissions and average days of care for psychiatric services are again rising. In 2002, 25% of the group's survey respondents had occupancy rates higher than 84%, which can mean limited access to services, particularly more specialized mental health programs. While partial hospitalization admissions increased in 2002, capacity in the system remains a concern, the survey reported, as fewer beds exist after facilities closed or limited the number of patients they can accept.
Overall, the industry's payer mix has shifted between 1996 and 2002 as commercial insurers have picked up a smaller share of behavioral health inpatient admissions and Medicare and Medicaid have gradually picked up a greater share. Medicare-, Medicaid- and state-funded patients-those receiving care in free-standing psychiatric facilities that states contract with-accounted for nearly half of all inpatient admissions to NAPHS-member organizations in 2002, according to the survey.
Covall said funding resources for the industry remain far from optimal, but lawmakers are looking for better solutions. The NAPHS has been working with officials from the federal Substance Abuse and Mental Health Services Administration to potentially reallocate resources to the private sector that have traditionally been provided to public systems.
"We're looking to build on what the public sector has already done," he said. "State funding is one possibility, and also potentially making some changes in Medicaid and Medicare to broaden the spectrum of services that they reimburse."
The industry will get some reimbursement relief when the CMS changes how it pays inpatient psychiatric facilities. As of April 1, providers will transition over a three-year period to a prospective payment system from a cost-based system. The proposal will affect an estimated 2,000 free-standing facilities, as well as psychiatric units in general acute-care hospitals. Lehman Bros.' Aston said the new payment model, which reimburses providers based on patient acuity, is expected to be a real "net positive" for the industry.