Joint ventures and strategic affiliations in the behavioral health care sector have begun to proliferate over the last few years and will continue to do so in 2022 due to several factors. Among these are accelerated demand for behavioral health care services, limited bed capacity and the ability for hospitals, health systems, private equity-backed providers and strategic operators to complement one another in the pursuit of greater access to quality, comprehensive behavioral health care for patients .
Mutual Benefits of Behavioral Health Joint Ventures
There are different types of joint ventures, but a common joint venture partnership that has emerged in the behavioral health arena is that between a hospital/health system and a for-profit behavioral health operator.
It comes as no surprise to those who operate and work in hospitals and health systems (among others) that behavioral health patients are often admitted through the emergency room. This is not new but is one of many circumstances that have been accelerated by the pandemic. It often results in placement of behavioral health patients in settings that are not best suited to serve them and causes serious occupancy issues in the emergency room and hospital that it is a part of, which impacts other patients. To help address this, forming a joint venture can, for example, spur development of a new facility off-site that is better designed to serve behavioral health patients. Concurrently, it can also help to release pressure from emergency rooms and open up medical and surgical bed capacity to the benefit of other patients as well.1
Additionally, many non-profit health systems have aging behavioral health facilities that need replacement or upgrading. With many hospital and health system budgets strained by pandemic-related and other demands, a joint venture with a partner that has significant “dry powder” can be helpful to facilitate much needed facility upgrades and other capital investment.
In other cases, a hospital’s behavioral health unit may be poorly managed and/or unprofitable. For-profit operators with substantial experience and expertise in operating sophisticated, quality behavioral health facilities can bring that expertise to bear to help a hospital or health system that currently operates a behavioral health department that is not well-managed, is not profitable and/or does not consistently provide quality care. The for-profit operator may also be able to take on more of the administrative burden of operating the department, freeing up capital, time and other resources to focus on higher quality, greater patient satisfaction, consistency of clinical services and access to same.
As noted in more detail below within this Newsletter the acute shortage of behavioral health providers and staff is hampering efforts to improve access to quality care in clinical settings across the board. Large for-profit operators often have substantial resources dedicated to provider recruitment and often maintain a large network of behavioral health providers. These factors in a time of scarcity of behavioral health provider resources can also serve as a significant motivation for hospitals, health systems and health care providers to align with for-profit behavioral health providers in some fashion.
For-profit behavioral health operators are often motivated by, among other things, access to new markets in partnership with established providers like a local hospital or health system. This affords the for-profit behavioral health operator the opportunity to benefit from the hospital or health system’s reputation, trade name and brand to gain instant credibility in the market and to more rapidly position itself, with its joint venture partner, to serve local patients with behavioral health care needs.2
Certain Reimbursement Considerations
Increase in demand for services, the movement by some health plans to better prioritize mental health, technology advances and some degree of enforcement of mental health parity laws have made behavioral health joint ventures more feasible and helped drive some additional revenue toward provision of behavioral health care.3 However, joint venture partners should continue to be mindful about potential impacts on payment. For example, it may not always be possible to maintain similar reimbursement for a given behavioral health service when provided in a freestanding facility as opposed to, for example, a hospital department. The joint venture should take careful stock of how payment rates in a freestanding facility might compare with what the health system was able to achieve in that regard in the past.4 On a related note and depending on what kind of services will be offered, type of facility, the number of patient beds and whether the joint venture will seek reimbursement from Medicaid for treatment provided, the parties need to be mindful of Medicaid-related payment restrictions with regard to Institutions for Mental Disease (“IMD”)5 and develop a plan to address same to the extent such restrictions apply.
Look for More Behavioral Health Real Estate-Focused Joint Ventures.
All of the factors noted in this Newsletter that are driving demand for behavioral health services and related M&A activity are also contributing to an increase in joint ventures focused on behavioral health care real estate. Such joint ventures and other behavioral health-focused investors are making investments and working with health care and behavioral health care operators across the country to re-purpose inpatient and residential care facilities, among other things. Many such investors and joint venture partners see great opportunity to expand their current real estate footprint. The growing and non-cyclical nature of this real estate market is also drawing in more investment activity and interest.6
1 Patrick Connole (Guest Contributor), Behavioral Health Joint Ventures Sprout as Demand Rises, Behavioral Health Business (February 9, 2022) https://bhbusiness.com/2021/10/14/behavioral-health-joint-ventures-sprout-as-demand-rises/
2 Cody Taylor, CVA and William Teague, CFA, Behavioral Health Joint Ventures: Recent Activity & Key Considerations (February 9, 2022) https://vmghealth.com/thought-leadership/blog/behavioral-health-joint-ventures-recent-activity-key-considerations/
3 Infra, n. 1, above.
4 Infra, n. 2, above.
5 42 USC § 1905(i).
6 Kyle Coward, As Behavioral Health Care Demand Rises, the Need for Real Estate is Only Growing, Behavioral Health Business (February 9, 2022) https://bhbusiness.com/2021/11/01/as-behavioral-health-care-demand-rises-the-need-for-real-estate-is-only-growing/
© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume XII, Number 63