The CEO of Pyramid Healthcare discusses how private equity has helped him diversify through M&A while mitigating the company’s reliance on Medicaid reimbursement
When Clearview Capital (“Clearview”) acquired Pyramid Healthcare (“Pyramid”) in 2011, the firm saw an opportunity to address a lack of treatment options for patients across the larger behavioral health landscape.
Pyramid is headquartered in Altoona, Pennsylvania, with more than 80 treatment facilities that offer residential drug and alcohol treatment for adults and adolescents, outpatient mental health and chemical dependency treatment offices, methadone clinics, eating disorder residential and outpatient facilities and six private schools for autistic children.
Jonathan Wolf, who founded Pyramid in 1999, previously ran free-standing psychiatric and substance-abuse treatment hospitals in Florida, Georgia, Utah and Ohio. As part of a wide-ranging discussion, he highlights how private equity has helped Pyramid diversify its business through M&A and position the company as a platform for future growth.
Q: Clearview has been backing Pyramid since 2011. Can you talk a bit about the genesis behind the original deal and how the company has grown and evolved over the past decade?
A: When we first went to market back in 2010, all of Pyramid’s revenues derived from one state, Pennsylvania, and our business was heavily weighted toward Medicaid at the time. Each of those characteristics posed big risks, which were only compounded by the amount of debt we had on the business. Additionally, we did not have sufficient free cash flow to grow and diversify as quickly as we wanted.
But Clearview also saw the latent growth potential, and their investment effectively refinanced our capital structure and allowed us to re-align the business to mitigate some of the more immediate threats. We were able to secure new lines of credit, which allowed us to diversify through acquisitions in different states, and then as our cash flows have grown, we’ve invested that back into the business. There has been a “synergistic” effect that occurred just by Clearview absorbing some of the risk and then making capital available to fund growth and diversify our revenue streams.
Those were obviously big catalysts. But private equity in general can also help business owners execute some of the more technical aspects of value creation. For instance, we’ve made 11 acquisitions since Clearview partnered with us eight years ago. We’ve looked at north of 300 potential deals – opportunities that we never would have had access to without PE resources. Private equity also brings a financial skillset that can be invaluable in analyzing and vetting potential acquisitions, while also evaluating the “buy versus build” opportunity and then helping to pinpoint which deals represent the best strategic fit.
It’s worth noting, too, that every private equity firm is different. You’ll hear stories about other sponsors who may come off as more overbearing and intrusive, for instance, particularly throughout a relatively long eight-year holding period. Clearview, though, has distinguished itself as a partner who brings resources as necessary, but allows management to create and then progress with our vision. They’re patient when they need to be patient, but also hold us accountable to make traction in our growth strategy over time.
Q: Pyramid has always had exposure to Medicaid, which has traditionally scared off investors given the reimbursement risk. Can you talk a bit about how Pyramid and Clearview have worked together to mitigate that risk?
A: When Clearview acquired us, about 85% of our revenues were tied to Medicaid reimbursements. That was obviously too much and a lot of other prospective buyers viewed it as a weakness at the time. Since then, though, we’ve targeted a number of deals that helped shift our payer mix to include more commercial insurance. Today, we have a nice balance with an approximately 50/50 split between Medicaid- and commercial insurance-driven revenues.
While there tends to be some reservations around Medicaid among investors, there are some significant benefits that can be overlooked. For instance, you get paid almost instantly by Medicaid. Co-insurance and deductibles are very minimal or non-existent with Medicaid and most Medicaid programs generally allow for longer lengths of stay. Each of those variables are pretty positive from a business perspective and often equalize our reimbursement for a treatment stay between Medicaid and commercial insurance.
The other consideration is that as a country, we’re battling what has become a huge opioid epidemic. At both the federal and state level, the government needs to increase their resource commitment for chemical dependency treatment. Against this backdrop, the risk to state funding for these services is not as pronounced as it once was. The fact that Pyramid can provide Medicaid treatments at a cost structure that allows for growth provides another advantage that has only become bigger as we’ve added scale and built certain efficiencies into our business. Many competitors struggle to provide high quality care at Medicaid rates while retaining enough profits to fund growth.
Q: That’s a good point. Beyond just diversifying Pyramid’s payor mix, M&A also allowed you to expand your geography. Can you discuss your M&A strategy in a bit more depth and perhaps highlight some of the overlooked considerations for CEOs in working with sponsors to effect a consolidation strategy?
A: One of the initial opportunities that I believe helped define Clearview’s investment thesis was the abundance of acquisition targets in behavioral health. We offer a full continuum of care, including detoxification, residential rehab, outpatient counseling, halfway housing, eating-disorder treatment and autism schools. Clearview has been very strategic in helping map out an acquisition plan that diversifies our revenue by state, by primary diagnosis (mental health versus chemical dependency), by the site of care and, as we’ve discussed, by the mix of payors. In terms of our geographic growth, though, we went from a business that only operated in Pennsylvania to, today, providing services to communities in five states, including Georgia, Maryland, North Carolina and New Jersey.
But beyond just targeting the best geography, I think we’ve collectively been smart to stay in our lane and not get outside of our areas of expertise. As I mentioned, we have a filing cabinet full of deals that we’ve looked at, but we’ve only pursued a fraction of those because we’re being judicious about integrating valuable acquired assets “in our wheelhouse.” We want to ensure we’re not creating new risks that can accompany expansion in verticals where we have not shown previous knowledge, expertise, and success.
Another point worth highlighting is that Clearview has also focused on the organic growth opportunities as well and we’ve upgraded our IT, compliance, electronic record, HR, finance, development and revenue cycle infrastructure to facilitate greater scalability. This has been advantageous given the rapid-growth environment we’re in, but Clearview has been willing to make these investments to help us build a better, more sustainable business for the long-term.
Q: As you’ve alluded to, the behavioral health sector has gotten quite a bit of attention given the opioid epidemic. But what do you see as the biggest challenges and opportunities over the next decade, particularly given the focus in Washington to address the crisis?
A: The biggest challenge today is simply staffing our facilities. This will continue to be a challenge in the future. Given that the U.S. is at full employment, it’s raising the bar on salary requirements and benefits, which can squeeze margins. So we’ve focused quite a bit of attention on hiring, training and retaining human resources and scaling up the HR management function in support.
Another big challenge, given the growth of the behavioral health segment, has just been the rush of new entrants in the space. This amplifies some of the staffing obstacles, as we’re all competing for the same high-quality professionals. But it also puts pressure on pricing, as you’d expect in any free market economy.
All that said, Pyramid’s value proposition lies in our scale and the fact that we can differentiate ourselves based on the quality of care. For instance, we have invested pretty heavily in our call centers, which provide a sourcing advantage. And we can leverage this as we bring new facilities into the fold.
Our vertically integrated system of care allows us to retain patients in treatment longer, and provide demonstrably improved outcomes, which is increasingly important to payors. And quality matters most. This doesn’t stem from one thing, but rather speaks to our approach in everything we do. For instance, on the residential side of our business, we provide transportation to 100% of our clients who enter our facilities. And then we take them home at the end of their care. It’s this kind of personal and compassionate service that differentiates Pyramid.
