America’s deteriorating mental health is a golden opportunity for investment funds

In the past, in the United States, psychiatrists and psychologists practiced in their independent practice. Now, the corner mental health center may well be controlled by a “king of redemption”.

Venture capitalists and private equity firms have poured billions of dollars into psychology firms, psychiatric clinics, online therapy health platforms, new drugs, meditation apps and more. other digital tools. Nine mental health startups, including Cerebral and BetterUp, reached valuations exceeding $1 billion last year.

The demand for such services is only growing as more and more people face sadness, anxiety and loneliness amid lockdowns and rising death rates due to the Covid-19 pandemic. Thus, bankers, consultants and investors consider that the sector is mature and that it has become more attractive since health programs and insurance better reimburse mental health costs and virtual platforms facilitate remote care.

“Since Covid, the needs are skyrocketing,” says Kevin Taggart, partner at Mertz Taggart, a mergers and acquisitions firm specializing in the behavioral health sector. “All of the mental health companies we work for are experiencing strong activity. Many of them have waiting lists. »

Globally, mental health tech start-ups received $5.5 billion in investment last year, a 139% increase from 2020

In the first year of the pandemic, anxieties and depressions increased by 25%, according to March figures from the World Health Organization (WHO). About a third of Americans report experiencing signs of anxiety or depression, according to the Centers for Disease Control and Prevention (CDC).

In 2021, the number of acquisitions in the behavioral health sector jumped more than 35% from the previous year to reach a total of 153, of which 123 involved private equity firms, according to Mertz Taggart . For the first quarter of 2022, there are 41 acquisitions, 30 of which concern venture capital companies.

This foray into the world of mental health is not without danger. A rush by venture capitalists could drive up firm prices and reduce potential profits. For both patients and professionals, the risk is that the new owners focus on profits more than results, for example by putting pressure on practitioners to receive more patients than they can handle. . If health becomes less personalized and less private, the quality of care received could also suffer.

The prescribing practices of online mental health companies like Cerebral are beginning to come under scrutiny. The Wall Street Journal reports that some Cerebral nurses say they were pressured to prescribe stimulants. Last week, Cerebral announced that it would temporarily stop prescribing controlled substances like Adderall to treat ADHD for new patients. Last year, Cerebral’s valuation soared to $4.8 billion.

Globally, mental health tech start-ups received $5.5 billion in investment last year, a 139% increase from 2020, according to a report by the research firm. CB Insights analysis. American companies account for 4.5 billion. These can be platforms like SonderMind, which connect patients and practitioners, or meditation apps like Calm.

Venture capital firm General Catalyst has recently invested in ten such companies, including SonderMind, which raised $150 million last year. In April, General Catalyst launched a $50 million funding round for Eleanor Health, which provides in-office and online addiction and mental health care.

Private equity firms like KKR that get involved in this sector tout their ability to invest in patient privacy systems, unlike independent practitioners, and say they don’t sell patient data to third parties or take advantage of them

Growing interest from investors and payers is attracting entrepreneurs, says Holly Maloney, chief executive of General Catalyst. “There is an inertia effect,” she says. “People want to start businesses that they know will be worth investing in. »

For Ms. Maloney, one of the big questions will be whether start-ups will be able to get reimbursement for their services from insurers. “This innovation excites us, and we will have to see how the mentality of payers evolves,” she believes.

The Mental Health Parity and Addiction Equity Act of 2008, a federal law that requires reimbursements for mental health to be at the same level as those for other medical care, laid the legal groundwork for insurers and health plans to provide these services. But many don’t have a strong enough network of therapists to meet their members’ needs, which creates an opportunity, investors say.

Mark Frank, managing director of SonderMind, explains that his company offers care from local therapists in person or online, and that one of the main selling points it presents to clients and investors is that its practitioners are covered by most insurers in the states where the company is present. According to him, employers are the driving force behind this change. “They had to bang their fists on the table and say ‘we want this reimbursed’,” he says.

Employers and investors have begun to take a greater interest in mental health during the pandemic by seeing the impact with their eyes and in their private lives. “We see it in our children. We see it in our colleagues,” reports Mr. Frank.

Recent successful investments in the sector have also sparked interest. Taggart says Summit Partners, a Boston-based private equity firm, approached his mergers and acquisitions firm in 2017 with a view to buying small psychiatry and psychology practices. At the time, the idea seemed risky. “I said to myself “but how are you going to manage all this?” »

Summit has supported LifeStance, helping it grow into one of the nation’s largest outpatient mental health care companies. In May 2020, TPG and its investors acquired a majority stake in LifeStance, valued at over $1 billion. LifeStance went public last year.

Earlier this year, Kelso & Company sold Refresh Mental Health, another medical center operator, to Optum, a UnitedHealth-owned entity. The financial terms of this sale have not been made public.

Many private equity firms have experience buying and building medical, dental and veterinary practices, and see similarities in mental health. They claim to be able to set up vast networks and help alleviate the burden on caregivers, particularly from an administrative and technological point of view. According to them, making appointments is also facilitated.

For Eileen O’Grady, research director at the Private Equity Stakeholder Project, a consumer advocacy group, more practitioners or health centers doesn’t necessarily mean patients receive better care. “The private equity business model is at odds with the goal of providing quality health care,” she says, as this type of investor seeks to generate cash and quick returns on investment.

Private equity firms like KKR that get involved in this sector tout their ability to invest in patient privacy systems, unlike independent practitioners, and say they don’t sell patient data to third parties or profit from them.

“The only way for these companies to be a success for investors is to run them with a focus on quality so that both patient and provider benefit,” said Ali Satvat, co-director of the healthcare investment department at KKR.

Hank Mannix, chief executive of Kelso, says day mental health facilities have proven to be sound investments as practitioners have continued online consultations during the pandemic. He adds that Refresh increased the number of its caregivers during Kelso’s fourteen months of ownership from 2,100 to more than 3,000, and expanded its business from 20 states to 36. really didn’t stop for a second when we owned it,” adds Mannix.

Last summer KKR launched an outpatient mental health service, Geode Health. Geode recruits psychiatrists and therapists, buys existing practices and opens new ones throughout the United States.

Over the next few years, KKR expects to draw between $100 million and $200 million from one of its funds to finance Geode. The company plans to eventually build a network of several hundred caregivers and offer services in regions of the country where care is lacking.

“Covid has brought mental health issues to light, and exacerbated them,” says Satvat. “There is a huge demand, and the response is insufficient. »

KKR has also invested in a company called Brightline, which offers online behavioral health care for children, teens and families, and operates Blue Sprig Pediatrics, which serves approximately 150 U.S. centers for children with autism spectrum disorders. .

For Tim Epple, managing director of Avalere Health, a healthcare consulting and analytics firm, the maturity of most acquisition targets in the mental health sector is not sufficient to justify the strategies reduction in costs typical of the private equity universe.

“There are still a lot of individual practitioners, small groups of therapy, psychology and psychiatry,” he explains. “For private equity firms, the extreme fragmentation of the market means many opportunities to build platforms and increase the number of doctors. »

(Translated from the original English version by Bérengère Viennot)

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America’s deteriorating mental health is a golden opportunity for investment funds

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