Behavioral Health Treatment Centers: The Next Big Real Estate Trend?

By Tim Callahan

Mental health issues have long been marginalized and treatment options for related illnesses have traditionally been sorely lacking. Today, however, the outlook is much brighter for those seeking behavioral health care. Recently the Centers for Medicare and Medicaid Services (CMS) changed its payment model to improve access to and quality of mental health care, and the Affordable Care Act (ACA) eliminated treatment roadblocks. The current dynamics are encouraging new players to jump into the game and changing the previous rules of engagement.

For many years, mental health care was relegated to stark, cold psychiatric institutions or far-removed wings of traditional hospitals. Hospitals have evolved and are bringing behavioral health care to the forefront. Bright and welcoming freestanding behavioral health hospitals are sprouting up across the country, expanding the footprints of local health systems. Many facilities include amenities such as fitness centers, yoga classes and outpatient therapy centers. In many cases, health systems are partnering with other systems or operators to develop new facilities, as evidenced by the recent joint venture of Columbus, Ohio-based Mount Caramel Health System and Tennessee-based Acadia Healthcare.  The development of a new, 80-bed inpatient behavioral health hospital in Columbus is a case-in-point for such arrangements.

In addition to existing health systems, REITs are emerging as formidable players in the behavioral health sector. REITs are pumping capital into the sector at an increasing pace. Under this arrangement, operators and health systems maintain control of business operations while accessing capital previously locked up in their real estate. The investment trust owns and maintains the property and leases the space back to the provider. The REIT has a vested interest in the success of the entity, not just because it is a rent-paying tenant but, also, because the associated real estate consequently improves value. Recently, for example, Care Capital Properties (now part of Sabra Health Care) purchased a portfolio of six behavioral health hospitals in a $400 million sale-leaseback transaction.

Along with healthcare REITs, the behavioral health sector is attracting private equity investors. Growing demand for services plus favorable government legislation and strong margins make behavioral health facilities increasingly desirable to investors. In this scenario, private equity investors are more closely tied to the business than REITs. Therefore, payor mix and care delivery models factor heavily into investment decisions. Entities offering both high-end inpatient and lower cost outpatient treatment are viewed as most attractive, as revenue is generated across the continuum of care.  In 2016, 60 percent of behavioral care transactions were consummated by private equity investors.

The forecast for the behavioral health care sector continues to look positive for providers and investors alike. Legislation is making care more accessible and affordable and, when combined with changing societal norms, is driving increased demand for services. Providers, investors, and those in need of services will all be winners under these conditions.