February Newsletter

Greetings and thank you for engaging with us. We hope at this point, you’re steeped with activity implementing your 2024 growth initiatives. Today, we’ll share some of our thoughts and insights through our 2024 Behavioral Healthcare forecast. Before we dive into to the forecast…a brief news break sharing some exciting news about C4 Consulting:

The C4 Consulting Team is honored to share that Ian Gershman has advanced to the role of Chief Operating Officer of C4 Consulting. As a vital part of the team, for the past seven years in Ian has served numerous clients and supported the C4 Consulting’s growth, impact, and success through his role as a Senior Consultant. Through his deep commitment to integrity, compassion for those he serves, and dedication to improving outcomes and impact for providers, Ian strives to support the clients and collaborative partners at our behavioral healthcare firm for the betterment of the lives of individuals, families, organizations, systems, and communities connected to our work. We look forward to his continued growth in this new role as Chief Operating Officer, and the impact it will bring through our organization and those we serve. Ian will continue to serve as a Senior Consultant and critical member of the C4 Consulting Team in addition to taking his growing role and opportunity. Please help us congratulate and welcome Ian to the C4 Consulting leadership team!

Now, back to our previously scheduled program. With 2023 in the rearview mirror, we strive onto to the next leg of our journey. We’ve focused specific key areas for our 2024 forecast and included some select considerations to raise awareness of, consciousness towards, and illumination of potential growth opportunities.

Mental HealthCare Growth: Steadily Rising Demand

Lifespan numbers in the U.S. are decreasing for the first time in years, with suicide rates in older adults rising quickly. The consequences of remote and virtual work environments are producing greater challenges for people to find alternative supports for stress management.

According to the APA Healthy Minds poll, more people are prioritizing mental health and wellness in their 2024 plans and resolutions, with respondents planning to see a therapist (35%) or psychiatrist (21%).

Mental health and wellness are the unresolved past, present awareness, and growing future need for behavioral health. Attention to social wellness is on the rise and certainly part of the longer-term solution to help resolve mid- and longer-term concerns of growing mental health impacts on individuals, families, and communities. The de-stigmatization of mental health and a focus on the strengths-based perspective of balanced and better mental wellness (one of the identifiable results of living through Covid-19 together), has more people thinking about, reevaluating, and resolving to address, mental health care.

Most people will start in outpatient settings, where some will require higher levels of care for acute stabilization before continuing their healing journey on an outpatient basis. 2024 will see a steady increase and rise in the utilization of mental health care, as we are still understanding the long-term mental health impacts of Covid-19, as we all recover from such a generationally traumatic series of events.

In 2024 the SUD space will transform:

The Substance Use Disorder treatment space has been a bit of a roller coaster pre and post Covid-19. The highly publicized Opioid Epidemic ongoing pandemic show that despite our best efforts to meet thecare needs, demand for treatment is still rising. 2023 in the SUD space evidenced a willingness to embrace balancing virtual services with in-person services, but the outcomes are still being measured to show what the long-term efficacy of an integrated service delivery approach yields. The SUD space in 2024 is going to reposition and transform. Here are some factors from 2023 informing this transformation[JD1] .

1. DEA Telehealth and Controlled Substance Rule Updates

The Drug Enforcement Administration (DEA) 2023 extensions of COVID-19 era tele-health responses included continuation of allowing virtual providers to prescribe controlled substances (including medication-assisted treatment — MAT ) over tele-health with no in-person visit. These extensions are scheduled to expire at the end of 2024, tasking the DEA with an imperative finalize how it plans to deal with virtual MAT prescribing in the future. The DEA will also address overdue changes to controlled substance prescribing, to include revisions to methadone prescribing, which will open new opportunities for growth in outpatient programs to consider adding additional multiple pathway approaches for addressing the ongoing opioid use pandemic, as well as challenging some providers to consider revising their own perspective on integrating more multiple pathway approaches to their offerings.)

2. 2023/24 CMS Reimbursement Schedule Updates

In November of 2023, the Centers for Medicare & Medicaid Services (CMS) released its Physician Fee Schedule (PFS) and Outpatient Prospective Payment System (OPPS) final rules for Calendar Year (CY) 2024. These updates include new coverage options for substance use disorder treatment for beneficiaries, addressing some of the historic gaps in Medicare coverage. While Medicare has been on the radar for many providers looking to grow their service audience range to be more inclusive of older adults, the reimbursements for these coverage expansions (like much of Medicare) are challenging for some providers to accept and integrate into their operations. Outpatient continuum providers will benefit from being extended to include increases to treatment and billing options by mental health counselors & marriage and family therapists, increased support for integration of Peers & Community Health Workers addressing social determinants of health and expanded coverage for intensive outpatient counseling services in specific settings to include but not limited to Opioid Treatment Programs.

Additionally, increases to various reimbursements include adjustments to psychotherapy codes, behavioral health integration codes, and the bundled office-based substance use disorder codes (G2086-G2088). The increases demonstrate CMS’s acknowledgement that the reimbursement rates for mental health and substance use disorder services do not accurately value the amount of work that goes into delivering these services and contributes to a workforce shortage, amidst the ongoing mental health crisis and opioid public health emergency. These increased CMS reimbursement rates also raise the floor from which commercial insurance plans baseline their reimbursement tables, forecasting increases available to providers who can (and should) be negotiating and renegotiating higher reimbursement rates to offset production cost increases that continue to escalate as the economy recovers from Covid-19 recovery calibrations.

3. Balancing increased business costs with improved Payer negotiations

In discussions with several C4 Consulting Clients, leadership among substance use treatment continuums reported that over the past four years, costs for producing treatment services have risen 17%-21% of average, while reimbursement rate negotiation increases for these same organizations have capped at a growth rate of 13.5% — 19% of the same period. Approaching rate negotiations and renegotiations for many organizations isn’t a scheduled practice, as one might assume, as many providers struggle to adequately prepare or presume rate increases from payers will correspond naturally to inflation and economic corrections. With 2023/24 CMS increases to coverage opportunities and reimbursement rate gap adjustments, it is critical for providers to closely reexamine their payer contracts and seek assistance to strategize for effective and overdue rate reconciliations.

4. 2023/24 Federal Government Updates to Parity Rules

President Biden’s Budget for Fiscal Year (FY) 2024 includes $10.8 billion for the SubstanceAbuse and Mental Health Services Administration (SAMHSA), $3.3 billion over the agency’s fiscal year 2023 enacted budget. This marks the second consecutive year that the Federal Government has enacted budget increases over $3 million for this agency, but in some ways, this seems like the tail wagging the dog. Federal Government investments for the U.S. in behavioral healthcare related spending has been woefully inadequate when compared to the rising demand of mental health demand and needthroughout communities across the country. Although the Biden Administration’s 2023 summer publication of a proposed new rule to update the Mental Health Parity and Addiction Equity Act is still in process, with some portions of the rule being forecast for implementation in 2025 and 2026, progress in mental health parity is evident.

Behavioral health equity remains a priority for long-term planning, political agendas, and economic stability. With these parity progress updates, especially the insurance payer focused conditions regarding reimbursement rate adjustments needing to include outcome measurement conditions as part of the proposed rule, many are still hopeful that values-based care will become the norm sooner rather than later.

5. Increased focus on Values-Based in 2024 (Short Tagline)

Values-Based Care in 2024 should yield progress for values-based care initiatives with payers, but we urge providers to consider building and integrating the systems and processes necessary to effectively sustain values-based payer contracting into their 2024 operational goals and not to wait for the payers to catch up or offer values-based opportunities. 2024 can be an opportunity for providers and payers to focus on relationship management that includes growing to be less adversarial with each other.

We recommend mastering your values-based care process and bring it to the payers in negotiations. Begin with actively developing your measurement-based care practices, developing cultures that make these practices the norm rather than a trendy catch phrase to bolster SEO for digital marketing or conversations at industry events. If you haven’t started truly integrating even the most basic outcomes tracking and management into your operations, start small and build toward the future, showing the impact of your work through the lives of those served, with the data to demonstrate the change. If you wait for the payers to offer comprehensive rate increases through values-based contracting platforms, you might find yourself in 2028 wondering how other providers have done so well managing their outcome and data systems for demonstrating measurement-based care, watching their margins outpace inflation.

2024 Growth Focus: Outpatient Services[JD2]

Population demand for behavioral health services continues to increase as more people seek help and care for improving their lives. Most will not start or continue their wellness journey by starting with residential care. While residential care is the best fit for the appropriately assessed in need of care, for providers, residential reimbursements are stagnant at present and human capital costs and shortages making staffing residential continuums for growth a significant challenge. Average daily occupancy rates remain steady at 69–72% and utilization review rates are holding at a national average of C4 Consulting clients surveyed at 16 days per residential stay. As we enter 2024. These numbers aren’t likely to see massive increases as the year progresses. We caution investors new to the industry still look toward residential as their first option and urge existing providers to closely examine effective scaling of residential programs before planning too much growth in this level of care.

In Comparison, outpatient options continue to expand and 2024, outpatient services will experience significant growth, both for new startups, and existing providers, especially in the mental health focused sector. Outpatient care has a lower barrier for access and higher engagement rate, and quite frankly in best practice, should always be assessed for as the first option of treatment. Outpatient care also has a lower cost of production and operation, making it a more affordable consideration for investment and expansion.

Lastly, continuums of care that include higher levels of care have the operational mechanisms to appropriately manage human capital investments (staffing, training, culture, and service integrity). Family integrated care and programming and alumni (i.e., longer term outpatient groups) are becoming more salient and relevant for outpatient growth. These opportunities, coupled with wider implementation of highly successful ambulatory withdrawal management programs, are producing comprehensive outpatient service arrays that are growing and outperforming historically oriented, larger continuums of care. Outpatient services produce more highly individualized care, which leads to better measurement-based care outcomes and sustainable changes for persons served, while providing better financial opportunities to control economic impacts and inflation related market corrections.

2024 Merger and/or Acquisition Activity: Strategic Priorities Prevail

Investment in the behavioral health industry will continue to grow despite many pundits fearing a deep freeze in Mergers and/or Acquisitions (M&A). Those who focus on M&A are still reeling from the inflated activity wake of over-valued business being traded at inflated multiples during Covid-19. 2023 saw the M&A market “cool” while interest rates rose, lending qualifications for behavioral health resumed to their previously assessed risk categories, and those riding the wave of inflated growth have moved onto to investing in AI and related software platform company sectors. For some of those who weren’t so fortunate as to get involved in the epic M&A growth experienced during “the Covid-19 years” of behavioral health M&A, they’ve found new growth and opportunity in “content creation” (which is likely to become the dot com bubble of 2024). We are forecasting that 2024 M&A activity growth will be focused in three select scenarios for the behavioral health industry:

1. Founder/Owner/operators will consider and, in some cases, continue to seek exits via M&A, earlier than planned largely due to impacts of Covid-19 and challenges recovering during economic market corrections. This group finds themselves recovering from the stress impacts for the past few years, drowning in the rising tide of challenges with Human Capital management concerns, navigating payer reimbursement plateaus, and attempting to adjust margins through steadily rising costs to running a business. With slowly adjusting reimbursement rates, shifts to market consumption of higher levels of care as the starting points for treatment, and poor timing of not exiting with a clearly defined strategy/discipline pre-post Covid-19, these individuals and groups find themselves challenged to amount effective growth among the stressors. They are now “the tired…huddled masses…yearning to breathe free…looking for a golden door”.

Many have spent 2023 trying to recover, and found themselves seeking refuge through an exit, or at the least, a collaborative partner who has the skills, abilities, and capital to invest in their growth. These are typically programs that offer incredible services, wherein the burdens of business ownership now outweigh the benefits. This group will, as such, be tasked with offsetting 2023 slow financial growth with demonstrating the value of the culture of the business during M&A negotiations. Rather than have the culture of their organization erode and ultimately impact they people they serve, they are seeking opportunities to transition into the next phase of their entrepreneurial careers.

2. Strategic Acquisitors in markets that were “hot” but are “cooling” due to economic pressures, real estate valuations, level of care plans for expansion being reevaluated, Human Capital Management challenges, and investment capital costs. This group is focused on being highly selective in finding opportunities to integrate into or find growth with existing provider groups or networks for their growth. Let’s face the facts, almost every behavioral health business ran through cash reserves during COVID-19 safety protocols, have spent their Employee Retention Credit (ERC) incentives they received, and are preparing for the tax implications of 2023 as they consider their 2024 plans. Some haven’t recovered enough to balance out sufficient financial reports with trailing twelve-month (TTM) report’s warranting higher valuations and multiples, so some target business are ready for transition into a larger portfolio and consolidated expense management to grow.

Some existing providers are planning reinvesting in themselves through de novo expansion rather than paying higher interest rates to lenders or sacrificing points on a deal due to slow financial recovery. Existing providers backed by Private Equity (PE) are highly interested in de novo expansion, as take PE margins and investment thresholds are capped by existing margin expectations for these stakeholders. Existing providers looking to invest in themselves could greatly benefit from healthcare financial consulting. C4 Consulting has decades of experience in behavioral healthcare and understands the complications and details that come with a de novo expansion.

3. For Strategic buyers, both scenarios provide excellent opportunities, and we are likely to see transactions remain steady in 2024, especially with a focus on mental health outpatient practices. Cost containment remains a priority and strategic considerations will dominate 2024 M&A activity. Will margin expectations for investors and owners shift to realistic proportions in 2024? The answer is most likely yes, as few people are finding success with low-ball offers for valuable businesses and fewer are responding to demands from sellers of deal multiples above 7 times EBITDA. For the first time in over 7 years, nonetheless, 2024 should demonstrate that investment and interest in behavioral health M&A will result in steady growth for quality programs and services.

2024 Forecast Awareness: AI Integrations, Marketing Considerations, and People First

Artificial Intelligence (AI) will continue to integrate into behavioral health. In stiving to continuously fin innovative (or some would say “disruptive) ways to leverage technology, our field will continue to explore how to integrate generative AI functionality into practice.

Although this trend will at first likely find itself overwhelming peoples’ email inbox with sales pitches for AI integrations and offerings, more and more providers will asses how to operationalize AI to improve productivity, enhance business operations, and drive better outcomes for improved care. Caveat Emptor: current AI integrations still need a person to make the information gathered in seconds by AI engines meaningful and useful, so don’t plan on replacing any people with software quite yet. AI is trendy at present, but rest assured, it is not a trend, nor has its development been a trend.

AI will be thoughtfully and wisely implemented by those who can harness its powerful process. Whether that process enters the realm of ethical and best practice remains to be seen, but we recommend considering how to slowly integrate some use of AI functionality to enhance data mining and information collation into behavioral health operations. If you don’t, your vendors will, whether you accept it or not.

Relational Marketing becomes more valuable than ever as AI and digital marketing efforts increase in cost and maintain a plateau of efficiency. Person to person, or often referred to as “relational marketing” will need to resume building access to care and stabilizing census growth for providers. Current SEO and digital marketing optimizations are producing effective results for portion of Marketing Strategic plans, but few providers rely 100% on referrals only from digital media marketing channels. Relational Marketing will continue to be a central focus for most during 2024. People refer to people where trust can be built and grown more efficiently than even AI can influence.

Relational Marketers will need to diversify their referral sourcing to include more direct relationships with workforce channels, community groups, as well as emergency and primary healthcare providers to find success. Since 2023 forecasters emphasized “trust as the new currency” in behavioral healthcare, so 2024 will be a year of continuing to build and grow trust, thus relational marketing will drive engagement in fostering trust, brand awareness, recognition, authority, and reach.

Human Capital Manage needs and opportunities will significantly influence business growth 2024. Workforce shortages and increasing workforce demands aren’t diminishing anytime soon. Behavioral health businesses will need to continue to reexamine their dedicated focus on investing in their principal asset: people. Whether through updating compensation plans, refining administrative (and clinical) supervision processes, improving recruitment and retention measures and practices, enhancing education and training, and other human capital developments, focus on workforce growth will be vital in 2024. We recommend you consider investing in your people first, then other priorities to follow.

On a related note, skilled labor is in demand nationwide, so what are behavioral health providers doing to support vocational growth within psychosocial domains of those they serve? More providers should consider increasing their focus with persons served on vocational life growth as a normative part of care. With continued need and slowed development of primary healthcare integrated care coordination amongst behavioral healthcare providers, prioritizing treatment plans focused on engagement strategies that support vocational development as a fundamental psychosocial domain are a key to reducing stressors that influence social determinants of health and wellness.

At C4 Consulting, 2024 is starting off with our investment into people first, as evidenced by the growth of our leadership team. We hope that these observations and insights help inform you of new opportunities, support your growth for strategic initiatives underway, and raise awareness to considerations you might not have prioritized. We look forward to providing updates on these forecasts throughout the year, not just at the year’s end. If you are interested to learn more about how we arrived at our forecast list, then reach out to connect with us, as discussions about compliance are always welcome. We look forward to being of service and support.

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