Mental health legislation could boost behavioral firms

The debate over stronger gun control measures—a key focus of President Barack Obama's State of the Union address Tuesday night—could boost behavioral health companies if any legislation includes provisions for expanded mental health services.

The gun reform debate has increased attention to mental healthcare, according to A.J. Rice, an analyst at UBS, who noted that the companies with the most exposure to these issues are Universal Health Services, King of Prussia, Pa., and Acadia Healthcare, Franklin, Tenn.

Mental health services have wound their way into the larger conversation about gun violence after the December massacre of more than two dozen people at Sandy Hook Elementary School, Newtown, Conn. Early reports suggested that gunman Adam Lanza may have suffered from one or more mental illnesses.

Expanded access to mental health services has been championed by both the Obama administration as well as bills such as the Mental Health First Aid Act and the Excellence in Mental Health Act, which were introduced in the Senate this year.

Mental healthcare has also been used as the counterargument against more gun ownership restrictions. As recently as Tuesday night, Rep. Tim Murphy (R-Pa.) jumped on the gun control agenda in the State of the Union address, criticizing the president for not addressing mental illness.

And there's evidence that new legislation would make a difference to providers that treat psychiatric conditions. The behavioral health space has already been receiving more attention from financial investors since the 2008 Mental Health Parity and Addiction Equity Act, which provided new protections for mental health coverage.

“That really made the (behavioral health) treatment business a lot more attractive,” said Hunter Peterson, a partner at private equity firm Trinity Hunt Partners, which has made three investments in the sector since 2008. "When the world was largely a cash-pay business, people weren't really interested."

The Patient Protection and Affordable Care Act also requires small group and individual plans to offer mental health coverage starting next year, and the law already expands dependant eligibility for a key at-risk group, young adults under the age of 26.

The increased attention to mental health, as well as easier access to insurance coverage, has led demand to outpace supply in the behavioral health market, according to a 2013 industry outlook from RBC Capital Markets. Acadia, the only pure-play behavioral health provider, saw its share price increase 134% over 2012.