This discussion took place on October 12, 2022, during the BHB Invest Conference in Chicago. The following has been edited for length and clarity and is intended for informational purposes only. At the 2022 Behavioral Health Business (BHB) Invest Conference, industry experts Tani Weiner and Bragg Hemme shared critical insights into the legal and structural issues shaping Healthcare M&A in the behavioral health sector. Their discussion highlighted the complexities of deal structuring, regulatory compliance, reimbursement challenges, and the importance of thorough due diligence in Healthcare M&A.
Meet the Experts
Tani Weiner, a specialist in Healthcare M&A with 20 years of experience in the behavioral health space, has worked as in-house counsel for organizations like Aspen Education Group, CRC Health, and Acadia. Currently at Polsinelli law firm, she represents investors and providers in Healthcare M&A deals, navigating the sector’s unique legal and regulatory landscape.
Bragg Hemme focuses on regulatory compliance and reimbursement, helping behavioral health providers secure and retain revenue. With over a decade of experience, Hemme ensures compliance with payer requirements and mitigates risks that could disrupt revenue streams in Healthcare M&A.
Key Structural Issues in Healthcare M&A
Weiner emphasized that the behavioral health sector is not monolithic—different subsectors, such as addiction treatment, mental health, eating disorders, and applied behavior analysis (ABA), come with distinct regulatory, legal, and reimbursement challenges. A critical structural consideration in Healthcare M&A is the corporate practice of medicine (CPOM) prohibition in many states, which mandates that medical practices be owned by licensed clinicians or operate through a “friendly PC” model. Unlike physician or dental practices, behavioral health requires tailored structures due to variations in clinical models, state regulations, and service lines.
Key diligence areas in Healthcare M&A include:
- Payer sources: Ensuring revenue streams are sustainable and compliant.
- Admissions and marketing practices: Scrutinizing for regulatory compliance.
- Ancillary revenue streams: Evaluating lab services or other add-ons for risk exposure.
Hemme added that reimbursement dynamics vary by payer mix. For providers relying on commercial or private pay, reviewing payer contracts is critical to confirm whether they transfer in a deal or require pre-closing approval. For those with Medicare or Medicaid, compliance requirements are stricter, increasing the risk of penalties and necessitating rigorous chart reviews and structural diligence to ensure timely deal closure in Healthcare M&A.
Preparing for a Successful Healthcare M&A Deal
Weiner stressed the importance of assembling the right team to navigate the Healthcare M&A process. For owner/operators, many of whom are first-time sellers, competent legal and financial advisors are essential to manage expectations and prepare the business for scrutiny. This includes packaging the business to support valuation and ensuring it can withstand rigorous buyer diligence.
A common issue Weiner highlighted is the “iceberg issue,” where providers rely on a small number of credentialed clinicians to bill for services performed by a larger group, often due to high turnover or lax billing practices. This can raise red flags during diligence, potentially leading to audit risks, recoupment demands, or deal delays. Proactive remediation—identifying and addressing such issues early—can significantly improve the chances of closing a deal in Healthcare M&A.
Hemme echoed the importance of thorough due diligence, particularly for licensing and credentialing. With the rise of telehealth, ensuring clinicians are licensed in the states where patients are located is critical, as many COVID-era waivers allowing cross-state practice have expired. Additionally, facilities offering intensive outpatient (IOP) or partial hospitalization programs (PHP) via telehealth may require state-specific licensing, even without a physical presence. Buyers must verify both individual and facility-level credentials to avoid compliance pitfalls in Healthcare M&A.
Evolving Reimbursement Trends
The panel noted a shift in how deals are evaluated, moving from a trailing 12-month financial analysis to a current 12-month forecast that accounts for compliance and sustainability. Hemme emphasized the need to substantiate claims through financial and legal audits, ensuring revenue is compliant and replicable post-acquisition. Issues like unsustainable billing practices or reliance on ancillary services (e.g., labs or marketing-driven patient acquisition) can depress valuations if not addressed.
Weiner added that payers are increasingly scrutinizing behavioral health spending, looking for opportunities to recoup payments due to licensure or credentialing mismatches. Providers holding state or federal licenses may also face delays in deal timing if new applications or approvals are required post-transaction.
Addressing Licensing Gaps
When asked about handling sellers operating without proper licenses, Weiner shared an example of a provider pursuing licensure for a level of care not yet regulated in their state. In such cases, a clear plan to achieve compliance can mitigate risks. However, providers operating “under the radar” without intent to obtain licensure face significant challenges, as most buyers are unwilling to assume such risks.
Hot Segments in Behavioral Health M&A
Weiner noted strong activity in addiction treatment, outpatient care (including transcranial magnetic stimulation, or TMS, and Spravato), substance use disorder (SUD), mental health, eating disorders, and ABA. Hemme highlighted the growing demand for adolescent mental health services, driven by a nationwide shortage of providers.
Private Equity and Strategic Considerations
Private equity investors are increasingly focused on the rapid evolution of behavioral health, driven by social needs, new treatment models, and reimbursement innovations like value-based care. Weiner sees opportunities in hybrid models that blend brick-and-mortar care with telehealth to expand access and integrate with primary care. Hemme emphasized the importance of strong payer relationships, which can support sustainable reimbursement models, such as episode-of-care payments that cover a continuum from residential to outpatient telehealth.
The Staffing Challenge
Staffing has emerged as a critical deal point. Weiner noted that buyers often reassess valuations based on market-based workforce costs, which can differ from a seller’s operational reality. Hemme highlighted the impact of clinician burnout and turnover, which strains organizational health and financial valuations. Addressing staffing challenges through competitive salaries and robust management talent is essential for providers to remain attractive to buyers.
Conclusion
The behavioral health landscape is complex, with regulatory, reimbursement, and structural challenges varying by subsector and state. Thorough due diligence, proactive issue remediation, and strategic alignment with evolving care models and payer expectations are critical to closing successful deals in Healthcare M&A. As Weiner and Hemme underscored, assembling an experienced advisory team and staying ahead of compliance and licensing requirements can make the difference between a deal that thrives and one that falters.
For more insights into navigating the Healthcare M&A landscape, stay tuned to industry events like the BHB Invest Conference, where experts share actionable strategies for success.
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