04.03.2024

From ABA to IDD: The Next Big Thing in Behavioral Health Investment

Home and community-based services have been the investment gem of the behavioral health market for the past decade, but SimiTree’s experts in mergers and acquisitions say providers of other types of home and community-based IDD services are garnering increasing attention from deal-makers.

In 2023, deals involving providers of IDD (intellectual developmental disorder) services accounted for nearly one-third of all transactions in the behavioral health field, according to SimiTree Associate Principal Mark Romano, who heads the company’s mergers and acquisitions services.

“Market conditions right now are prompting impressive numbers of IDD mergers, acquisitions, joint ventures, and partnerships,” Romano said. “For buyers and sellers alike, IDD is an important slice of the behavioral health investment market.”

Across the behavioral health market, smaller companies are looking to expand, medium-sized companies are merging or acquiring smaller companies to strengthen themselves for sale to larger companies, and larger companies are exploring innovative new partnerships to meet growing market needs.

Investors are highly interested in all of it, Romano said — but particularly in the IDD area, where they hope to repeat some of the same types of autism deals that have paid off in previous years.

“Autism has traditionally been the area of behavioral healthcare most appealing to investors,” Romano said. “In the years leading up to the COVID-19 pandemic, investor interest in companies providing autism spectrum services spiked, meaning that valuations also accelerated, and we saw multiples that were off the charts.”

Transactions multiples — and other metrics used to value a company — for providers of autism spectrum disorder services have been strong enough over the past decade to warrant continued interest and prompt investors to seek out companies offering similar types of services.

IDD is a healthcare subsector of great interest to investors because it encompasses a broad range of conditions that may impact physical and emotional development as well as intellectual functioning. Services provided to those with an IDD diagnosis may be vocational and non-vocational in nature and are often designed to address impaired learning, reasoning, problem-solving skills, and adaptive behavior (everyday social and life skills.)

What’s driving IDD deal-making interest?

IDD is a large industry with more than $30 billion in annual spend, but it has traditionally been a field where services were delivered on a small scale, by non-profit providers, often church or community organizations.

“Until recently, IDD has largely been comprised of non-profit and faith-based organizations,” Romano said. “Although there were some providers who were larger, we generally didn’t see large for-profit organizations delivering IDD services, or even large non-profit operations.”

But the market is trending toward consolidation of smaller companies, Romano said, and recent consolidations have created some industry giants.

Last year, non-profits Merakey and Elwyn came together to create a joint company fielding a 12,000-person workforce caring for 55,000 individuals in 16 states. In Ohio, IDD providers I Am Boundless and Koinonia also merged in 2023 to operate under the Boundless brand, becoming the state’s largest behavioral healthcare provider.

Why the IDD market is transforming?

Romano points to a number of factors that are impacting the behavioral health market to make it accommodating for IDD deal-making.

A cultural shift in recent years lessening the stigma associated with mental health services has played an important role, he said, opening the door to increased interest in IDD deals.

In addition, the Centers for Medicare and Medicaid Services' (CMS) stance on home and community-based (HCBS) services for people who have significant physical and/or cognitive limitations has greatly increased the need for the types of services IDD providers offer.

“CMS established provisions for home and community-based settings that require an inclusive environment, integrated with the community, as the standard for enhancing the quality of services provided under Medicaid — but, frankly, many states and providers have struggled to comply,” Romano said.

“IDD providers with an effective business model fit right into the CMS framework for ensuring that services facilitate autonomy and independence. There’s a huge need for these types of services in almost every community.”

A look at IDD deal-making risks

Investors may be lured by the burgeoning IDD opportunities, but Romano cautioned that IDD investments come with serious risks — as well as potential profits.

IDD requires strategic services implementation beyond the generic, with person-centered and highly individualized methodology governing all care and services. Interdisciplinary approaches require teams of doctors, psychologists, social workers, and other specialists to collaborate, and each player brings to the table additional sets of clinical requirements and regulations.

“Any time you look at a transaction involving the heavily regulated healthcare industry, there is potential risk involved,” Hawthorne warns. “IDD is a particularly nuanced healthcare field, bringing multiple compliance concerns and issues with it.”

Documentation compliance risks can pose significant challenges in home and community-based services and IDD, particularly concerning client care, personnel management, and billing practices. The most common potential risks typically observed in clinical due diligence include:

  • Non-compliance with federal, state, and/or payer regulations with respect to client and personnel record documentation
  • Incomplete or inaccurate documentation that may result in billing errors including overbilling, underbilling, or billing not supported by documentation.

IDD transactions also require considerable financial considerations, from inflated EBITDA due to temporary rate increases during the pandemic to how COVID-19 relief funds are reported on income statements, he said. Other pandemic-related financial measures affecting valuations include how companies may have used American Rescue Plan Act (ARPA) funds or Medicaid incentives.

“Whether the company used ARPA funds for bonuses or pay increases, for example, can affect go-forward margins,” Romano said.

Because there are so many smaller companies providing IDD services, it is not unusual to find companies still operating on cash-basis rather than accrual accounting systems, Romano said, and the conversion required for diligence can lead to changes in reported financials.

“As with any transaction being considered, it’s imperative for potential buyers and sellers to be cognizant of all the risks, identify the full potential, and carefully evaluate the pros and cons,” Romano said.

How SimiTree Can Help

SimiTree brings a deeper perspective to every transaction. Our extensive regulatory knowledge, niche healthcare background, and financial and operational acumen provide unmatched insight into areas of potential risk, problematic performance, and untapped potential.

For Home and Community-Based Services including IDD, our clients receive the most value from every transaction, and our M&A experts guide them to fully protect the value of the investment through future management.

Use the form below or call us at 866.839.5471 to discuss how we can help your company make intelligent and effective decisions, identify hidden costs and regulatory risks, and reap full value from every transaction.

 

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