Newsletter – December 2018

Behavioral Health: Industry Consolidation and Innovation Is on the Way

John DeLorenzo, Director, CFO Consulting Partners LLC

According to the National Alliance on Mental Illness, 43.8 million people in the U.S., or approximately one in five, suffer from mental illness. Approximately 60% of those affected are not treated, in some part due to a shortage of mental health providers as well as a shortage of available insurance coverage. The result is a significant increase in the use of emergency services for behavioral health issues. The National Council for Behavioral Health reported during a recent three-year period there was a 42% increase in the use of emergency services for behavioral health. By the time a patient reaches emergency services for their condition, it is likely that the condition is much more severe than if they had received treatment earlier. That said, the availability of coverage for behavioral health issues is improving due to a law enacted in 2010, the Mental Health Parity and Addiction Equity Act of 2008 (MHPAEA), which made insurers offer no fewer benefits to an individual for mental health treatment than for physical health treatment. In 2014, the Obama Administration widened the scope of coverage through the Affordable Care Act (ACA), by making mental health coverage a requirement for insurers.
As a result of improved insurance coverage, the number of individuals with behavioral health coverage is increasing at a faster pace than there are services available to treat them. Furthermore, the need for behavioral health services is increasing significantly due to the opioid crisis and other drug and alcohol addictions, in addition to the increased prevalence of learning disorders appearing in children such as ADHD and autism. According to the National Alliance on Mental Illness, in 2014, $221 billion was spent on mental illness compared to $135 billion in 2005 according to Health Affairs. Expenditures are expected to rise to $281 billion in 2020 according to The Substance Abuse and Mental Health Services Administration (SAMHSA).

Based on the increases in those seeking behavioral health services, the industry is ripe with opportunities for consolidation, aggregation, and innovation.

Due to the shortage of behavioral health providers, the sector is going to need to rely on technological innovations such as aggregation of data to identify and head off behavioral health issues before they become more complex behavioral issues or result in comorbidities. For example, patients with diabetes have a higher rate of depression and therefore those diabetic patients should be identified and observed for potential depression. The ability to aggregate data to identify patients with possible behavioral health issues early on will hopefully lead to treatment before the illness becomes a more complex problem. Another significant technology opportunity includes digital therapeutics, where software is utilized to provide cost-effective treatment, thus reducing reliance on costly live providers and side-effect prone drugs. Other areas of digital therapeutics are games and other digital tools; aiding children with ADHD or individuals with less severe behavioral health concerns including insomnia, anxiety, and stress. Employers have expressed interest in treatments to reduce stress amongst employees and appear ready to pay for that service.

Another area of investment in the behavioral health space is utilizing technology to scale. The most significant barrier to mental health treatment is access to trained providers. There is a mismatch between supply and demand in rural areas. There are opportunities to develop telemedicine applications so that clinicians who specialize in specific behavioral health issues can connect with a broader population of patients; helping solve the low supply problems. This can be deployed live or in a prerecorded video format to rural areas or places like prisons.

Additionally, significant investments are being made in computerized tracking or in other words, automated workflows. The technology is centered around utilizing algorithms to determine when real-time intervention is required, alerting technicians to implement critical treatment in a timely manner or in anticipation of a negative behavioral health event.

The ability of the healthcare industry to serve the growing demand for behavioral health services in a cost-effective and efficient manner will require new ways to address the distribution of care. Primarily, we expect to see an increased aggregation of providers, deeper integration of services both within behavioral and general health, as well as a significant technological investment to optimize the deployment of service.

All of this provides significant investment opportunity with the potential for healthy returns for private equity investors interested in the healthcare space.

CFO Consulting Partners’ healthcare practice is here to help you, as we are focused on provider practices and technology, particularly in behavioral health. We can assist private equity to prepare a practice consolidation or technology acquisition/investment strategy. We are also available to help technology companies in healthcare with their growth strategies and fundraising.