The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference discusses behavioral health investing. It is authored by our colleagues Erica Jewell and Holly Buckley.

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Behavioral health continues to receive significant attention from PE funds. Market pressures around value-based reimbursement models are creating pressure on smaller businesses to consolidate and seek investment according to experts who spoke on a panel at the Annual Healthcare and Life Sciences Private Equity & Finance Conference in Chicago on February 20 and 21.

Experts included Russell Bryan, Managing Director of Bailey Southwell, Aly Champsi, Managing Director of DW Healthcare Partners, Cary Gibson, Vice President of Farragut Square Group, LLC, Matthew Pettit, Partner of Seven Hills Capital and Mike Healy, Partner at Healy Capital Partners. Matt Wolf, Director and Senior Analyst of RSM US LLP moderated the panel.

Here are five key points from the panel discussion.

1. The state regulatory environment is key when considering behavioral health targets for investment. State support for behavioral health programs is critical to the type of reimbursement behavioral health services will receive. States that have expanded Medicaid are generally more favorable for behavioral health investments as they provide patients with greater access to treatment programs. Therefore, when considering geographic location, it is important to understand whether the targeted state supports behavioral health treatment and growth.

2. Behavioral health is experiencing the same trend towards value-based reimbursement that is occurring across other health care sectors. Payors are looking for ways to implement outcome-based payment models. As a result, treatment methods are becoming more patient focused and customized in order to decrease the likelihood of a relapse. Payors prefer treatment methods that combine drug therapy and counseling as opposed to treatments focused solely on drug therapy. However, one obstacle has been the lack of providers necessary to accomplish this model. Though demands for behavioral health treatments are increasing, there are currently not enough psychiatrists and mental health counselors available to meet demand. Behavioral health platforms will have to consider innovative ways to extend resources, including in rural areas and those areas with limited providers necessary to deliver patient centered treatments.

3. Technology is crucial to increase scale and maximize resources. Due to the limited resources available in behavioral health, telemedicine has become an attractive method to maximize resources. Though payors have historically been hesitant to provide reimbursement for telemedicine services, this is starting to change. Further, the behavioral health landscape has traditionally experienced low levels of investment in EHR and other automated systems. However, as investors build scale, they are increasingly investing in technology solutions to build necessary infrastructure.

4. Investors should consider investing in multispecialty clinics. Many individuals who are undergoing substance abuse treatment are also experiencing comorbidities related to physical conditions. As a result, behavioral health platforms have found it difficult to adapt to value-based reimbursement, as traditional behavioral health companies are not equipped to treat the patient’s full range of conditions. Investor backed treatment facilities are starting to explore multispecialty treatment centers to allow patients to receive more patient centered and tailored care.

5. The fragmentation of the behavioral health landscape has created challenges, but investors should not be deterred. As many providers are small with very limited resources, building real scale may require significant capital investment. It is important to enlist high caliber management to build a strong behavioral health platform while still remaining cognizant of the mission driven goals that led to the creation of the original business.