Private equity is flying to behavioral health. What’s up with that?

Private equity (PE) is all over healthcare, with investment firms owning more than 400 hospitals around the US. But as the country faces a mental health crisis—US Surgeon General Vivek Murthy called it the “the defining public health crisis of our time”—PE has its sights set on one of the fastest-growing areas of the industry: behavioral health care.

PE has accounted for over 60% of all behavioral health deal flow since 2018, and firms like Thurston Group and Five Points Capital now own about a quarter of facilities offering behavioral health care in some states, according to a recent cross-sectional study published in JAMA Psychiatry.

A report by the nonprofit Private Equity Stakeholder Project (PESP) found that in 2023, there were 1,135 unique deals in healthcare involving 675 PE firms, business development corporations, venture capital firms, private credit funds, and other investors.

PESP reported that there were 44 behavioral health-specific deals in 2023. ARC Health—a behavioral health company backed by Thurston Group and Five Points Capital—made nine acquisitions in 2023, accounting for 20% of all behavioral health deals that year, according to PESP.

The interest in behavioral health comes as the need for such services has boomed. The national suicide rate, for example, grew 16% between 2011 and 2022 for a total of 539,810 lives lost, and Fortune Business Insights projects that the US behavioral health market size will grow from $83+ billion in 2023 to $115+ billion by 2030.

The PE debate. Supporters of the growing presence of PE firms in healthcare, like Hal Rosenbluth, CEO and chairman of healthcare-focused software company New Ocean Health Solutions and co-founder of Take Care Health, an in-store primary care clinic operator, say this trend can help close gaps in care. PE firm BPOC funded Take Care Health with $88 million in February 2006, Rosenbluth said, after an initial friends-and-family funding round of $10 million. Walgreens acquired the company in 2007, at which point one-third of the PE investment had been drawn down.

“Private equity is one of the solutions to our healthcare crisis because they fund the marketplace and create opportunities for advances in healthcare, hopefully, to bring down costs,” Rosenbluth told Healthcare Brew.

But others remain skeptical that PE has a positive effect on the industry. Vikas Saini, president of the nonpartisan think tank Lown Institute, told Healthcare Brew that the deterioration of quality care is his “biggest and first concern.”

“The kinds of returns that private equity expects and the kinds of methods they’re used to using outside of healthcare—which are the ones they’re importing into healthcare—are unlikely to give us that kind of an innovative, extraordinary startup that we all want to send our family to,” Saini said.

A cautionary tale. Steward Health Care, a Massachusetts-based health system, struggled to stay afloat after its PE investor Cerberus Capital Management exited in 2020. Cerberus made $800 million off the health system, the Boston Globe reported in April.

Steward filed for bankruptcy this past May.

The Lown Institute called this situation a “cautionary tale on private equity in healthcare,” and Sen. Elizabeth Warren said at a Senate hearing this spring that Steward is “a clear-cut case of private equity exploiting for-profit healthcare.”

Eighty healthcare companies filed for bankruptcy in 2023, and 21% of those were PE-owned, Healthcare Brew previously reported.

PE investment can also lead to an increase in adverse events and lower-quality care in hospitals, according to one study. The Boston Globe reported in January that the financial problems at Steward created conditions that led to the death of a patient after some of the hospital’s life-saving medical equipment had been repossessed. Warren and Sen. Ed Markey introduced a bill last week, the Corporate Crimes Against Health Care Act of 2024, to penalize companies that “loot” healthcare systems for profit.

Yusuf Sherwani, co-founder and CEO of Pelago, a virtual clinic for substance use management, said that PE is having a significant impact in behavioral health because the firms are buying up rehab centers and outpatient clinics in the same area, as well as “creating local monopolies used to drive up the price.” He said in many cases, this doesn’t improve the quality of care.

Sherwani said his company is “disrupting” the PE model, though, by taking in patients who haven’t seen results from a rehab facility or can’t afford to get that care, and only getting paid for the care if the treatment is successful. Pelago’s services, he said, are cheaper and more effective.

Zoom out. Rosenbluth said that matching up with the right firm is critical. “You have to pick the right private equity firm to work that has similar values that you do and understands your vision and your mission and your management team,” he said.

But Saini said that the way PE works right now, which often involves debt loading, is not set up to be successful for healthcare.

“Is it inherently a bad idea? I’d say with or in the right framework, it needn’t be, but we don’t have the right framework, and without the right framework, it almost certainly is not going to do good,” he said.

Sherwani agreed that PE has been “a negative part of the industry,” but he said that the problem is bigger than that.

“It’s...more just we need better innovation in healthcare that can really figure out how we can get care to people that need it.”