2023 is set to be a year of transition for behavioral health, as the COVID-era public health emergency (PHE) comes to an end and economic headwinds impact the global economy.
Companies that took advantage of the PHE’s relaxed regulations will finally get some answers to looming questions about their business model as the federal government comes out with more permanent regulations around telehealth and medication assisted treatment (MAT).
And while it appears the feds may be loosening certain regulations, expect some watchdogs to keep a close eye on digital companies dealing with controlled substances. Previously, digital health companies Cerebral and Done came under scrutiny for their prescribing practices – and that heat hasn’t cooled.
Meanwhile, it could also be a hot year for M&A. Although 2022 saw a slow down from a record-breaking 2021, it is likely that consolidation will remain strong this year as the behavioral health industry matures and demand continues to rise. The autism industry, in particular, will remain an active space for deals in 2023 as growing providers look to exit.
This could mean that organizations with dry powder may even be bargain shopping as struggling providers look to sell. Behavioral Health Business even expects nontraditional players like major insurers and retail giants to jump into this space more aggressively.
It is sure to be an action-packed year for the behavioral health industry. Here are some of the biggest trends that BHB sees defining 2023.
Higher-acuity care will step into the spotlight
Mental health has come into the limelight since the COVID-19 pandemic. As a result, billions of dollars have poured into new behavioral health startups and initiatives. But the bulk of these companies were focused on mild to moderate mental health conditions.
This is beginning to change as more and more providers are expanding or focusing care on patients with serious mental illness (SMI) and other higher-acuity needs. BHB has already written about a wave of newcomers, including firsthand, Amae and Vanna Health, that have entered the space with a mission to serve patients with SMI. The majority of these companies are using a community-based approach to serving patients with more serious conditions.
BHB expects to see more newcomers, with established providers likewise beginning to expand their offerings to include more acute conditions.
An example: Digital behavioral health provider Quartet Health in November launched a new virtual clinic focused on treating patients with moderate and serious mental illness.
Although digital providers may be looking to take their piece of the pie, it’s unlikely that digital providers alone will upending the acute care space.
“Given the complexity and the nature of SMIs, it’s always got to be high tech combined with high touch. It can’t be either or,” Pushkar Suresh Joshi, chief strategy and science officer at One Mind Accelerator, previously told BHB. “We are going to require all the tools in our arsenal to address SMIs [with] digital tools, whether it’s monitoring, whether it is engagement on these online platforms, even some aspects of delivery of care. But it will always be in complement with the hands-on care that is absolutely central to recovering from SMI.”
One Mind Accelerator is a nonprofit startup accelerator launched last year.
BHB expects to see a lot of innovation in SMI and acute care, as well as a lot of partnerships in 2023.
Expect more platform exists in autism
Behavioral health investment has been hot over the last few years especially because of investment in the autism space, which has focused on scaling up Applied Behavior Analysis (ABA) therapy providers.
The annual count of deals in the autism space steadily increased from 2013 to 2017. But in 2018, the count of deals, largely backed by private equity firms, doubled to 37 and increased the next year again to 46, according to proprietary data from The Braff Group.
This means there is a large cohort of private equity-backed autism companies that are looking for their next big move — an exit/sale, recapitalization or more tuck-in acquisitions to continue their growth. Assuming a traditional five-year hold period, the behavioral health space could expect to see an increase in platform deal exits.
For example, the private equity firm Arsenal Capital Partners acquired Indianapolis-based Hopebridge LLC in 2019. In 2018, Shore Capital Partners announced the sale of Boston-based The Stepping Stones Group to Five Arrows Capital Partners. The former has been an active acquirer through 2022.
Government watchdogs will be on the prowl
Public ire and federal scrutiny dogged several of the largest and then-fastest growing behavioral health tech companies during 2022. That’s not likely to change in 2023, if for no other reason than the plodding nature of formal investigations. Further, a lot of the issues that precipitated action still exist in the space.
The troubled digital mental health provider Cerebral Inc. was subjected to a congressional probe, Drug Enforcement Administration (DEA) review and an investigation by the U.S. Attorney for the Eastern District of New York – all in 2022.
BetterHelp and Talkspace, two of the largest incumbents in the virtual mental health segment, were also scrutinized by a trio of powerful Democratic U.S. senators.
And right at the end of the year, dozens of digital health companies, including behavioral health companies, were proven to be tracking sensitive user data and sharing it with “Big Tech” firms. Meanwhile, California is going after CVS Health for how it handles mail-order prescribing practices.
Real and perceived violations of patient privacy coupled with the proximity to Silicon Valley-esque practices like the courting of venture capital and rapid, tech-enabled growth have created potent foils for ire. Since virtual-only and hybrid companies as well as venture capital funding aren’t likely to disappear in 2023, it’s safe to say that a lot of the conditions that generate scrutiny will remain.
Already, we’ve seen the DEA take additional action against companies that it sees as part of an effort to exploit the slackened controlled substance regulations rolled out during the pandemic. During the summer, the DEA questioned makers of the ADHD drug Adderall over their request to make more of the drug following an explosion in demand, according to The Wall Street Journal.
Digital MAT providers will live to see another day
During the PHE, the federal government loosened regulations around MAT.
Specifically, the Substance Abuse and Mental Health Services Administration (SAMHSA) allowed for the initiation of opioid use disorder (OUD) treatment medication buprenorphine through telehealth. Additionally, the DEA lifted the Ryan Haight Act’s mandate that providers facilitate an in-person assessment before prescribing controlled substances as part of the PHE declaration.
This gave rise to digital-first companies entering the MAT space. But as the end of the PHE inches closer, digital providers were faced with an uncertain future.
A new federal rule proposal could be a signal of things to come. Late last, the federal government proposed a new rule that would expand on the PHE flexibilities and allow for authorized clinicians to initiate buprenorphine through audio-only or audio-visual technology.
The proposal even went one step further than the PHE flexibility, allowing authorized opioid treatment program (OTP) clinicians to provide methadone treatment through audio-visual telehealth.
BHB is still waiting on the DEA to come back with its long-awaited updates to the Ryan Haight Act, but SAMHSA doesn’t operate in a vacuum, and it’s likely the organizations are working together on a path forward. This could mean more opportunities – certainty for digital MAT providers in the future.
Beyond the rulemaking process, the end-of-year omnibus package signed by President Joe Biden on Dec. 29 included the bipartisan Mainstreaming Addiction Treatment (MAT) Act, which also goes a long way toward boosting access to OUD treatment.
Consolidation will still happen
2022 didn’t turn out to be the blockbuster M&A year of 2021. But with so much fragmentation in the behavioral health industry, there is still plenty of opportunity.
This is particularly true when it comes to digital behavioral health companies, many of which faced a number of setbacks last year. For example, virtual mental health provider Talkspace (Nasdaq: TALK) has struggled on the public market and faces the possibility of being delisted from Nasdaq.
Numerous reports have surfaced that telehealth company Amwell (NYSE: AMWL) is in discussions with Talkspace about a possible acquisition.
Economic headwinds could also mean that potential acquirers are getting these companies for a bargain.
But it isn’t just digital that will see consolidation. The behavioral health industry is still chock full of mom and pop providers. As demand grows and the industry matures, many of these providers will get scooped up by more sophisticated operators or private equity firms.
In 2022, behavioral health deal flow remained healthy, still beating pre-pandemic numbers. In fact, M&A advisory firm The Braff Group reported a total of 151 transactions in the first three quarters of the year. This could mean that 2022 was the second best year in this history of behavioral health deals.
It’s likely this activity will continue into 2023, and it will be a particularly hot time for consolidation for companies with some dry powder looking to get a discount.
A big name will have its ‘Refresh moment’
Last spring, UnitedHealth Group (NYSE: UNH) bought one of the largest outpatient mental health providers in the nation, Refresh Mental Health. Strategically, the idea was to bring Refresh under the Optum umbrella, pairing it with all of Optum’s other health care delivery assets, to better weave mental and physical health into the same tapestry.
“Refresh Mental Health … fits right into that value-based proposition in terms of how we believe we need to bring behavioral health management alongside medical management,” UnitedHealth Group CEO Andrew Witty said in April.
At the time of the transaction, Refresh operated across roughly 300 locations in 37 states. LifeStance Health Group Inc. (Nasdaq: LFST) was – and still is – one of the few companies rivaling that scale.
In 2023, opportunities for making a Refresh-like behavioral health splash are few and far between. Some estimates, in fact, claim that about 95% of the outpatient mental health space is made up of clinicians operating in private practice.
But that’s not going to stop other major payers, or even health care-focused retailers like Walgreens Boots Alliance Inc. (Nasdaq: WBA), from scouring the market for potential fits. CVS Health (NYSE: CVS) along with its health insurance arm, Aetna, is another key player with big behavioral health ambitions.
“We, as a health services organization, are committed to treat people’s mental health and physical health collectively,” Cara McNulty, president of behavioral health and mental wellbeing at CVS Health, previously told BHB. “Your head is connected to your heart, your heart is connected to your head and that is the premise we go with.”
It’s not clear what the deal will be exactly, but BHB is putting its chips on another outpatient mental health blockbuster in 2023 – likely in the first half of the year.
REITs double down on behavioral health portfolio adjustments
Multiple real estate investment trusts (REITs) shuffled their portfolios to lean more heavily toward behavioral health in 2022. That trend is likely to continue in 2023 for two main reasons.
On one hand, REITS have historically built their portfolios around senior housing and skilled nursing properties. Not too long ago, those markets appeared to be sure-fire investments due to the aging U.S. population. The COVID-19 pandemic, however, has changed how, when and where older adults want to age and recover, with a particular shift toward small-home senior care models and home-based care.
On the other, REITS – including CareTrust REIT (Nasdaq: CTRE) and Sabra Health Care REIT (Nasdaq: SBRA) – see burgeoning opportunities in behavioral health care. Both made moves to expand their operator partnerships in the addiction treatment space in 2022, for instance.
“We continue to meet with new operators and explore business relationships within the addiction recovery sector, as well as other areas of behavioral health, where we see investment opportunities,” Sabra Health Care Chief Investment Officer Talya Nevo-Hacohen said in November.
As of the end of last year’s third quarter, behavioral health facilities made up 13.5% of Sabra’s overall portfolio. In comparison, the company’s skilled nursing and transitional care asset class made up 60% of its portfolio, with senior housing making up most of the remainder.
Meanwhile, toward the very beginning of 2022, CareTrust revealed plans to “de-risk” its portfolio by dipping its toes into behavioral health waters by transitioning some of its struggling assets.
“We are cautiously optimistic about the opportunity to redevelop and repurpose assets into addiction recovery properties, which we believe would be a higher and better use for some of our real estate,” CareTrust President and CEO David Sedgwick said in February.
Nevo-Hacohen and Sedgwick both doubled down on their company’s commitment to behavioral health at BHB’s INVEST conference. While Sabra and CareTrust will likely continue with their conversion approach in 2023, they’ll likely look to find new operator partners, too.
If more behavioral health operators turn to REIT partners in 2023, it could help pave the way for additional growth by freeing them up from real estate obligations.
Providers will look to fill gaps in pediatric behavioral health
The pandemic revealed the gaping holes in the collective American behavioral health system. As the conditions and fallout of the pandemic lingered, the remarkable limitations of child-focused behavioral health care came into sharp relief.
Even mainstream audiences were captivated by stories of weeks-long instances of boarding for children needing behavioral health care because there was nowhere else for them to go.
Several behavioral health tech firms are seeking to cover the shortage of pediatric care with telehealth and other virtual solutions such as Meliora Health and InStride Health.
Federal and state governments have taken note. The federal government pumped billions of additional funding dollars into child-focused mental health initiatives following the mass murder at Robb Elementary School in Uvalde, Texas. The recent omnibus bill does so as well.
At the state level, Maryland will put up $100 million for the nonproft behavioral health and human services provider Sheppard Pratt to build a children’s hospital, global training center for workforce development and other projects, according to the Baltimore Business Journal.
Workforce challenges will come to a head, including unionization
The dramatic shortages of providers across the nation in behavioral health puts the advantage on the side of workers. While the largest operators in the behavioral health space such as Universal Health Services (NYSE: UHS) and Acadia Healthcare (Nasdaq: ACHC) have reported improvements in the workforce market, there are still several systemic challenges that diminish the labor supply in behavioral health. And these issues aren’t likely going to disappear in 2023.
Some workers have pressed the advantage the shortage has given them. In October, Kaiser Permanente behavioral health providers in Northern California landed a new four-year contract that expires in 2025 following a 10-week strike, according to MedCity News. A similar strike of Kaiser Permanente behavioral health workers in Hawaii is ongoing and has lasted 16 weeks. Sen. Mazie Hirono (D-Hawaii), and five other Democratic senators pressured Kaiser Permanente to reach a deal with the workers, saying Kaiser “has, for nearly five years, refused to negotiate in good faith.”
Growing discontent with how behavioral health tech providers treat mental health providers’ workloads is a subject of social media discourse. BHB and several other media outlets have tracked specific moves by companies that have peeved providers.
Additional contributions from Chris Larson and Robert Holly.