Investors favor in-network behavioral health providers for faster growth and returns

Investors favor in-network behavioral health providers for faster growth and returns

Despite higher reimbursement rates for private pay models, investors are turning their attention to in-network providers that offer stability.

Industry insiders tell Behavioral Health Business that in-network behavioral health providers have faster growth, faster revenue cycles and better overall returns. While building relationships with payers can be difficult, it can pay off for investors.

Private equity firm Shore Capital specializes in investing in in-network companies, and the technique has proven successful.

Chicago-based Shore Capital has invested in six behavioral health companies, totaling about 40 health care deals. The company has approximately $6 billion in assets. Its portfolio includes Behavioral Innovations, a provider of speech and applied behavior analysis therapy (ABA), and Brightview, an outpatient substance use disorder (SUD) provider.

“The reimbursement model has been very, very important to us,” founding partner John Hennegan told Behavioral Health Business. “There is no denying that Shore Capital has favored the in-network model since its inception. We have not completed a transaction that was primarily out-of-network.”

While in-network care has long-term benefits, relationships with payers can be slow to establish and the collection process can be difficult.

private salary benefits

At first glance, private pay organizations appear extremely attractive.

“There are a lot of out-of-network providers that have strong EBITDA or very good revenue,” said Craig Sager of Provident Healthcare Partners.

Provident Healthcare Partners is a healthcare banking services company with offices in Massachusetts, California, New York and Minnesota.

Odyssey Behavioral Healthcare Chief Financial Officer Scott Sarnacke told Behavioral Health Business that despite the high EBITDA, the private pay model still carries certain risks.

“There’s always the conversation of: ‘If we go into a recession, what impact will this have on your private payments business?’ It’s always an unknown risk,” Sanak said. “The reality is that our private pay business has never experienced a real downturn in its ups and downs. The demand for high-quality health care is always high. People are going to pay for it. But the network is a good, stable foundation.”

Brentwood, Tenn.-based Odyssey Behavioral Healthcare provides a full range of care for eating disorders, mental illness, dual diagnosis and other addictive conditions, although the company recently scaled back its eating disorder locations. The company has more than 50 treatment locations in nine states.

Hennegan said that despite historically investing in in-network businesses, there is still a place for out-of-network transactions in the investment ecosystem.

In-network cases

While private pay models boast higher reimbursement rates, investors are more interested in the faster growth associated with in-network models.

“The typical timeline for getting paid for an in-network claim is probably 30 days,” he said. “If it’s Medicaid, it can take as little as five or six days. If you’re out of network, it’s going to be a months-long process.”

“We would rather put that energy into training the next generation of providers,” he added. “Harness that energy and put it towards building the next clinic or getting to the next state.”

Behavioral health is undergoing a “shift toward quality,” Hennigan said. With fewer deals completed, investors are more focused on finding high-quality suppliers.

“Typically, getting into a network means you’ve gone through some kind of certification process, some kind of validation process, which is a sign of quality,” Hennegan said.

In addition to high quality, in-network models can lead to higher patient volumes. But switching to in-network isn’t a “simple button,” said Scott Sarnacke, chief financial officer at Odyssey Behavioral Healthcare.

“There’s a fallacy of quantity, which is that if you get into the network, the payers will bring you business,” Sanak said. “That’s just not true. In most cases … payers are generally not responsible for moving patients from one organization to another.”

Even with an in-network model, providers still have to do the “hard work” of marketing their company’s services to acquire patients.

The in-network model means significant cost savings and more consistent care for patients.

While some clinicians direct patients to make out-of-network claims, not having a contract rate can mean patients pay hefty bills.

When you’re out of network, the rates are very, very high, but a lot of those costs are passed on to the patient,” Sager said. “Unfortunately, that’s not what we need to do in health care and behavioral health things. ”

A higher price tag can keep patients from getting the care they need. According to KFF, six in 10 uninsured adults skip necessary health care because of the cost.

Racial disparities may further increase the impact of inaccessible care. Among non-Hispanic white adults, 39% say it is somewhat or very difficult to pay for health care. Among black and Hispanic adults, that number jumps to 60% and 65%, respectively.

In addition to higher costs for patients, an out-of-network model can also mean reduced long-term returns for investors, who may ultimately seek to move to an in-network model, resulting in lower reimbursement rates.

“If in-network service costs $50 and they charge $100 out-of-network, we look at that in a pro forma way,” Hennegan said. “What would the revenue stream look like if you changed all $100 payments to $50 payments? It would be significantly smaller.”

Still, switching to in-network is a good option for long-term results.

“We typically hire consultants or do behind-the-napkin math,” Sager said. “It’s going to say, ‘If you move to networking with your state’s payers, whether it’s Medicaid or commercial enrollees, rates are going to go down, but the flip side is the volume is going to go up.'”

Create an in-network model

While in-network reimbursement models may be more attractive to investors and lead to better profits, cultivating relationships with payers can be time-consuming and complex.

Odyssey started out as a private pay organization and is now primarily an in-network organization. The process begins at the request of the payer, which Sarnak said is a better option because the payer already has a need that the provider can fill.

Generally speaking, the key to starting a conversation is to find clinical overlap between what the provider is good at and what payers need in a specific market.

Since COVID-19, the timeline for building relationships has become more extensive, Sarnacke said.

“In most markets [the increase in time frame] Probably twice as much,” he said. “So if it used to take 60 days or 90 days to get something done, now it takes 120 to 180 days. “

Rush Brady, Odyssey’s vice president of finance and development, said a longer time frame still doesn’t guarantee a deal will close.

“If you can find someone to communicate with who is responsive and willing to explore a relationship, that’s definitely not a guarantee in this environment,” Brady said.

Negotiations and extended timelines enable sustainability and consistency in reimbursement and patient access to care.

“We made the decision that while running a business through collections can be a challenging, less efficient way to do it, it also provides a wider audience with access to the care you provide,” Sanak explain.

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