Baird Capital's Outlook on the Global Behavioral Healthcare Market
Around the world, the behavioral health, mental health and addiction sectors are growing significantly in terms of needs, challenges and opportunities. In the United States, the societal cost of mental health and addiction is $650-700 billion annually,1 with an estimated one out of four Americans over the age of 18 suffering from a diagnosable mental condition.2 In the United Kingdom, nearly 10 million people are dealing with mental health problems, accounting for 23 percent of the National Health Service activity and £19 billion in public sector spending, according to a report by Queen Mary University of London. In China, the psychiatric health market is projected to grow 16.7% from $4.5 billion in 2014 to $10 billion in 2019.3
While the trends and supporting data vary by country, common investment themes have emerged across Baird Capital's global footprint. To a certain extent in each of Baird Capital's target geographies, the approach towards addressing behavioral health challenges has evolved into highly fragmented and poorly integrated providers that have failed to demonstrate improved clinical outcomes, scalable practices or sound economic advantages to the key players. There is opportunity to invest behind the best providers in these fragmented markets – specifically in the addiction and autism markets – where the macro trends provide an opportunity for the highest quality programs to appeal to the payer community which we consider ideal for growth and prosperity.
United States: Primed for Parity
Previously, mental health was covered differently than conventional medical health services, leaving a gap to be filled by private pay. In 2008, the Mental Health Parity Act, along with the Affordable Care Act (ACA), expanded coverage improving the payer mix for many organizations by shifting patients from out-of-pocket to either Medicaid or commercial payers. Behavioral health organizations who previously prospered by serving patients that could afford to pay the extremely high costs out of their own pockets have been challenged to adapt to a third party payer environment where discounting and administrative demands make the economics of operation more complex. In this new, post-ACA environment, behavioral health providers must upgrade their leadership and infrastructure to operate more like the most successful institutions in the medical provider arena.
Today, the addiction treatment industry in the U.S. is replete with small, founder-run organizations, which has led to significant operational deficiencies. A lack of metrics driven data and decision making means missed opportunity to ensure the business is operating at appropriate levels of capacity utilization. Outcomes data also tends to be lacking while the rate of recidivism is very high. This becomes especially problematic as these facilities look to navigate the world of big insurance. Proving their clinical protocols are efficacious and cost effective has strained the ability of the largest provider organizations, let alone the proliferation of the founder-run businesses. This shift toward a traditional business model has posed significant challenges, yet many can be mitigated with proper operational expertise including a metric-driven commercial sales and patient monitoring engine.
Within behavioral health, autism has emerged as the most prevalent disability in the Intellectual Development Disorders space. According to the Centers for Disease Control and Prevention (CDC), one in every sixty-eight children in the United States falls on the autism spectrum. With diagnoses growing in the last five years to more than a million American children, there is an enormous demand for Applied Behavioral Analysis (ABA), an intense, consistent regimen provided by an individual therapist. Economic costs for autism in 2015 in the U.S. were estimated to be $367 billion and are expected to reach up to $1 trillion by 2025, a compound annual growth rate of 11 percent.4 However, the influx of covered patients is not being met by adequate supply as most companies have not yet reached appropriate scale to address the demand.
United Kingdom: Reforms Are Shifting Access, Quality
Historically mental health services have generally been of a lower quality than those for physical health, with lower funding relative to need, and a focus on containment rather than recovery. Today, demand for secondary mental health care is rising at a time when services are suffering from reduced funding and less accessibility. There remains extensive unmet need for mental health care in the market.
Children and young people are particularly impacted, as one in ten children aged 5-16 has a diagnosable mental health problem and many of them are unlikely to have access to treatment. Specifically, parents of children with autism face severe challenges in accessing adequate services in the UK, according to a 2014 report by Queen Mary University of London. There are more than 600,000 people living with autism in the UK today, which translates to an estimated annual cost of £32 billion in lost earnings, care and support for all of those involved. To help address this challenge, the Children and Families Act 2014 introduced the most significant reforms in decades to the framework for children and young people with special educational needs or disabilities. The reforms refine the coordination between the National Health Service (NHS), local authorities and Clinical Commissioning Groups. Effective implementation is improving the way needs are identified and support is provided, with the goal of securing better outcomes for children and young people with special educational needs or disabilities from 0 to 25 years of age, including those with autism, and their families.
Providing care for addiction in England has also recently undergone reforms. Provisional expenditure on these services in 2013-14 was £572.3 million for adults, with a further £75.6 million being spent on services for young people. Drug treatment in the UK is largely NHS delivered and encompasses a range of available primary and secondary treatments and services. In February 2014 the Care Quality Commission published new proposals for expert inspections and subsequent ratings of substance misuse treatment services, with new guidance and model rolled out to all providers in April 2015.
China: Demand is Driving Growth in Private Institutions
The mental healthcare market in China is RMB29.9 billion and highly fragmented. Combined revenue from the top ten healthcare groups accounted for 8.2% of the total market in 2014 and combined revenue from the top ten hospitals accounted for 7.2% of the market.5 Regionally, Beijing, Chengdu and Shenzhen are the biggest players in terms of availability and quality of mental health resources in the country.
As with the U.S. and UK, insurance coverage and access are major challenges. Even though almost all of China's population is now insured, patient out-of-pocket expense remains high at 36% due to strict reimbursement caps. By 2019, the number of mental health outpatients in China is predicted to reach 68.3 million and the number of inpatients is predicted to reach 4.5 million. However, in 2011 there were only 1.47 beds per 10,000 persons, which accounted for only about 15 percent of patients. It is clear that as the demand for mental health services grows, not only will more healthcare professionals and institutions be required, but more inpatient facilities will also be needed.
Unlike other developed countries and regions where private hospitals dominate the market, demand for mental health services in China primarily has been met by public hospitals. However, the overall market for private institutions in China is growing rapidly at a projected rate of 21.8% from an estimated RMB6.2 billion in 2015 to RMB13.6 billion in 2019, surpassing the corresponding growth rates for public institutions. Due to higher average patient spending in private psychiatric healthcare institutions, private providers accounted for a higher percentage of total revenue in the psychiatric healthcare market than public institutions on a relative basis.
The Road Ahead
Looking forward, Baird Capital is actively seeking opportunities to work with behavioral healthcare entrepreneurs in the U.S., UK and China as they strive to grow their businesses in a way that enables them to survive and flourish in this changing environment. As we explore new investment opportunities, we consider the scalability of the business, human capital competencies, effectiveness of the clinical offering, and how these businesses generate referrals. We are intrigued by the prospect of leveraging our global platform, significant network and deep sector expertise to help build their infrastructure and professionalize their processes to meet compliance standards, and look to build meaningful partnerships that could positively impact behavioral healthcare.
1 National Institute on Drug Abuse
2 National Institute of Mental Health
3 Frost & Sullivan
4 Journal of Autism Development
5 Frost & Sullivan