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My name is Ali Beheshti. I’m the owner of Zealie, a leading Revenue Cycle Management company.

As I work with behavioral health professionals, insurers and investors each day, I’ve written an article on the 3 essential strategies every behavioral health investor must know.

Please let me know if you have any feedback or comments.

Best,

Ali Beheshti

3 strategies every behavioral health investor must know

The behavioral health space offers a rare, win-win opportunity for investors: a chance to make a profit and a difference at the same time. Investing in behavioral health, however, does not resemble other industries: the presence of regulations, the reliance on outside parties (insurers) for compensation, and the challenges of the client population all make for a unique landscape.

Quite a few investors have been able to invest in and build profitable, long-lasting companies in this field. Because the behavioral health industry is so unique, due diligence is doubly important. It’s far too easy to make a fatal mistake.

Instead, beware of these three factors. For the purposes of this article, we’ll mainly be discussing behavioral health and substance use disorder (SUD) treatment providers.

1) How insurer-provider relationships work

Because behavioral health treatments are intensive and time-consuming, they are also often expensive. Further, as most patients are too devastated by their condition to work, they usually rely on their insurance to pay a provider rather than footing the bill themselves.

Because insurance is now more widely available than ever before, investors might have high hopes for rapid growth and a healthy ROI. After all, the Affordable Care Act (ACA) has broadened access to healthcare, reducing the uninsured rate to 12 percent and allowing more patients to get insurance, and thus treatment. In addition, the ACA has two other strengths: first, it allows Millennials, one of the demographics hardest-hit by the addiction crisis, to stay on their parents’ plans until the age of 26. Second, the ACA also prohibits insurers from denying treatment based on pre-existing conditions (which include behavioral health conditions and substance use disorders).

Yet insurance-provider relations remain confusing and complex. For one, many treatment providers are out-of-network (OON) with many insurers. Without a contract, a clinic faces wildly variable reimbursement rates. Facilities often find out well after completing treatment that their costs are in fact not adequately covered. If a facility is out-of-network, a course of treatment that normally costs $100,000 could potentially be reimbursed for a fraction of the amount by the insurer.

I have found this to be a widespread problem. Unfortunately, having insurance doesn’t necessarily equate to having in-network providers. Studies have found that many behavioral health specialists (such as psychiatrists and nurses) are out-of-network; in my experience, I’ve found that this problem is even more widespread with behavioral health clinics. Even where these clinics are in-network, they tend to only have a strong contract with one or two insurers; for most others, these facilities are OON.

In order for behavioral health facilities to make critical business decisions (and for investors to invest with confidence), they must know in advance the reimbursement rates and covered services of various insurers–especially out-of-network ones.

Here, technology and data analysis come into play: at Zealie, we use predictive models and historical data to provide information on reimbursement rates. Our intention behind building a cloud-based revenue cycle management (RCM) platform is to help behavioral health providers aggregate vital data, and draw key conclusions from them. Which treatments are covered by which insurers? For how much?

After all, information is key to getting a good deal. During the negotiation process, it helps to have a ballpark of how much an insurer reimburses for a specific service.

2) Scaling too quickly might hurt your bottom line

But the need for revenue cycle management (RCM) infrastructure goes beyond just insurer payments. Because investing is all about growth, one common mistake for investors is to buy a behavioral health clinic and immediately scale up–even if they don’t have the proper systems and data in place.

Unfortunately, growing your patient population too rapidly could wreck your business. What if you don’t know what you will be paid for out-of-network services? What if their insurance lapses while they’re in treatment and you don’t find out until it’s too late? Without a database of insurance rates and covered services or technology to manage revenue in real-time, it’s very difficult to plot out an effective strategy for expansion and growth.

These are all very real considerations–and arguments against doubling your bed size right off the bat. In other industries, especially manufacturing, scaling works well: producing and shipping widgets in bulk means a lower unit price, which can then be passed onto consumers. This translates to more products (and profit) simply through sheer volume.

Insurance plans, however, are quite the opposite. They’re not mass produced to the same standards: in fact, insurance plans are unwieldy, opaque, and often inconsistent, designed to yield a profit for insurers. For this reason, a well-run, 12-bed clinic that has strong contracts with some insurers, uses the latest and greatest billing technology, and a robust network of referral sources could well be more profitable than a larger, 24-bed clinic.

In fact, the 12-bed clinic would cost half as much to run as a 24-bed clinic–but it could generate twice as much revenue if the billing is managed properly. With a solid RCM system that uses the latest technology, one which features strong analytics and data processing, your chances of sustainable, profitable growth are much higher.

3) Location can be key to your success

Even with the advent of the Internet, location remains an important factor for behavioral health, if only because so much of its core work is done in face-to-face settings. Some of the highest need areas are underserved areas and populations which have high rates of addiction–but few providers. Such areas tend to be either rural towns or second-tier cities, whose populations tend to run just under a million.

Due to a number of factors, including dense social networks, a lack of alternatives to opioids (like physical therapy), and social factors like economic stress, rural America is particularly vulnerable to opioid addiction. In 2016, a University of Michigan study found that the rate of babies exposed to opioids in utero increased dramatically in rural America, far outpacing the rate in the nation’s urban areas. In 2017, the CDC announced that rates of drug overdoses in rural areas surpassed that of urban ones.

Beyond sheer need, rural areas may be advantageous to behavioral health providers, as they have fewer providers (less competition) but a highly-insured population (at least in certain states). One study found that 65 percent of rural counties didn’t have a single psychiatrist, and 81 percent didn’t have a psychiatric nurse practitioner. At the same time, states which expanded Medicaid, like Arkansas, Kentucky, and Nevada, saw their uninsured populations plummet by a factor of three.

Indeed, this care gap is a rare opportunity for investors to simultaneously do some good and earn some revenue. Not only are business expenses significantly lower (Nevada, for instance, ranks third in cost of doing business nationwide), but finalizing insurer contracts is much easier. Because these are underserved (yet highly-insured) areas with large patient populations, it’s more than likely that residents, insurers, and even the local government would welcome your facility with open arms.

Ultimately, behavioral health is a unique space that lives at the intersection of purpose and profit. But building a sustainable, successful business in this niche can be challenging. Because of its distinct challenges and obstacles, investors must double down on due diligence, avoiding key pitfalls such as scaling too quickly, underestimating the complexity of insurer-provider relationships, or opening clinics in the wrong places. Using the latest technology, behavioral health RCM companies such as Zealie have proven that with critical business decision making power, facilities could triple their revenue in just a few months.

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Ali Beheshti is the founder and CEO of Zealie, the premier Revenue Cycle Management company in the behavioral health space. Ali is passionate about transforming behavioral health by creating an influential business that uses data, automation, AI, and other emerging technologies to bring innovation and efficiency to the sector.

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