The autism therapy space got a shock to the system with hundreds of layoffs at major operators.
With the demand in services growing, investors and operators have seen the autism space as a golden investment opportunity. However, this rash of layoffs reveals the opportunity in autism comes with deep-seated challenges. A severe supply and demand imbalance sits at the core of them.
While demand for autism services is very high, steep workforce shortages have driven up labor costs. In turn, high turnover and high labor costs have tormented profit margins, according to several sources BHB interviewed for this story.
The raft of investments that came into the autism space was meant to capitalize on the supply and demand imbalance. The lack of services was seen as a greenspace opportunity to scale up operations to meet the demand.
But the workforce shortage has complicated that approach. Further, the new investment brought its own pressures to the autism therapy space.
However, these issues aren’t new.
“It’s not something that just happened overnight,” Tim Saumier, president and founder of Tyges BHR, a behavioral health staffing company, told BHB.
COVID-19 has accelerated trend lines in many spaces including behavioral health. Further, that pandemic also sped up the maturation of the industry. The universal stress of the pandemic highlighted the opportunity for investing in behavioral health. More funding than ever before has flooded into behavioral health.
“I don’t think it was unpredictable at all; I think it was very predictable,” Tricia Glick, founder and CEO of Behavior Science Technology, said of the layoffs. “People were turning a blind eye to things and not using the data that was available to them.”
By the numbers
Estimated autism rates show the size of the opportunity for investors and operators alike.
The estimated rate of autism in the U.S. has steadily increased over the last two decades. In 2005, the estimated autism rate stood at about 1 in 166 children, or 443,000 based on population data from that year.
The latest estimates suggest that the childhood autism rate in the U.S. is around 1 in 32 and 1 in 29. That’s an estimated 2.3 million and 2.6 million American children have autism.
At the same time, autism services — specifically Applied Behavioral Analysis (ABA) — grew in popularity. ABA advocates secured insurance coverage requirements in all states, further enabling ABA’s popularity. This is true of ABA as both a service and an investment.
That popularity as an investment gets magnified when considering how underserved the industry is.
The Braff Group data shows that the number of private equity investments per year tripled or quadrupled from 2018 to 2021 compared to 2015.
Autism workforce supply and demand
While the workforce imbalance isn’t unique in behavioral health, the ramifications of the imbalance can be seen in the recent layoffs.
There are 57,000 board-certified behavior analysts (BCBAs) in the U.S., according to the Behavior Analyst Certification Board. BCBAs lead ABA therapy regimens.
For every BCBA, there are about 41 children with autism, assuming that 2.3 million have autism. And assuming a high average caseload of 12, the current workforce can only serve about 684,000 children.
While the Behavior Analyst Certification Board shows major growth in BCBAs and other related professional certifications, it still compares to the levels of potential demand.
As autism service companies have sought to serve children with autism, many companies have had to pull from the same small pool. This has bolstered wages as demand for BCBAs to run clinics increased.
“We’ve watched salaries elevate” over the last 10 years, Saumier said in an interview. “What happens when salaries elevate? People jump ship, they tend to move on. … But that causes issues of salaries artificially climbing. And that means companies are overpaying.”
This, in turn, collides with stagnant insurance rates for ABA and uneven reimbursement parity, Saumier said.
ABA also has a problem with turnover among registered behavior techs, the staffers that spend the most time with patients. These are often wage-based jobs that are comparable to other roles in office worker, food service or logistics roles.
Some data show annual turnover rates of RBTs standing at 30% to 75%.
Glick said that RBT roles are unlike other front-line health care roles that see a lot of private equity backing such as dialysis or home care.
“The level of care that you’re trying to achieve in autism and ABA services is very unique and very different,” Glick said. “I think that’s the key to what folks we’re ignoring.
“This is not where the workforce is infinite where you can bring people off the streets … to just increase that work workforce.”
Margin and model pressures
Increased wages to attract staff, or inflated temp worker wages, drive up operating expenses. On top of that, staffing shortages limit the revenue an office can generate in the first place.
Further, most ABA operators get paid per each service performed. This is the fee-for-service model.
Jia Jia Ye, CEO and co-founder of Springtide Child Development, an ABA provider, told BHB this turns the ABA business into a numbers game.
“As your rates either compress or your wages are going up your margins are coming down,” Ye said in an interview.
She added that fee-for-service models put a heavy emphasis on retaining children.
“You’re also really focused on finding locations that you can make that arbitrage really efficiently while not improving your product,” she said.
Ye and Springtide currently have only fee-for-service contracts with their payer partners. Springtide is in talks with several payers to move to value-based care (VBC). In short, that model calls for payments based on the outcomes of care, not per visit.
In VBC, Ye contends the right payment structure could help account for workforce pressures. At the same time, these models could push providers to provide efficient and quality care.
Location, location, location
The two big layoffs that BHB has tracked so far are very much tied to geography.
Plano, Texas-based Center for Autism & Related Disorders (CARD) will be closing all 10 of its Oregon centers. Thes closures have resulted in 156 layoffs.
Additionally, Chatsworth, California-based 360 Behavioral Health is closing 9 locations and terminating 509 employees in Southern California. The closures are contained to the contiguous counties of Ventura, Santa Barbara, San Luis Obispo, San Diego, San Bernardino, Riverside, Orange and Kern counties
Rob Marsh, 360 Behavioral Health CEO, told BHB that workforce and reimbursement issues inspired questions about where it should operate clinics.
“For some time now, ABA services have been somewhat sporadically put up, haphazardly almost in some cases. You’d see large providers opening up clinics simply because it was a BCBA in the market,” Marsh said in an interview. “As an industry, we’re moving away from that and looking at each one of the clinics in a more meaningful and thoughtful way.”
That means opening clinics that reach targeted patients while being “financially healthy,” Marsh said.
Private equity and other investors have taken a shine to investing in the autism treatment space. Going into 2020, some expected investment to continue at breakneck speed, according to previous BHB coverage.
But investor funding came with financial expectations.
“The companies that have private equity came into the market with a ticking time bomb,” Joshua Rosenthal said in an interview.
Rosenthal is the owner and CEO of New York City-based Manhattan Psychology Group. Rosenthal’s practice provides several care specialties to adults and children.
“They needed to start showing profits and revenue that match their valuation. … So at some point, [investors] need to start seeing a return on their investment,” he said.
Rosenthal saw the early waves of investment go into the autism therapy space about 10 years ago and increasingly so about 5 years ago.
Today, some portion of the autism therapy space could be at the point of the investment life cycle where investors are pressuring operators to shift from scale to efficiency and profitability.
Axios Pro reported July 13 that the private equity firm NexPhase Capital LP was preparing to sell its stake in Austin, Texas-based Action Behavior Centers. NexPhase announced its investment in the Applied Behavioral Analysis and autism services provider in October 2018.
“You can’t see that amount of money to go in and continue to finance losses,” Chris Donovan, transaction lawyer and co-chair of the law firm Foley & Lardner LLP’s behavioral health team, told BHB. “I think the investors are going to want to focus their portfolio companies on actually making money and many of them don’t at this point.”
What could be coming in autism
Donovan says that the average private equity hold period is three to four years on the short end and six to seven on the longer end. This suggests that the market could be facing some kind of mixups as investors prepare for exits.
“I don’t think we’re heading toward a meltdown like the .com implosion,” Donovan said, adding he expects the market to do three things in 18 months. “Reset, pause, shake out.”
The reset and pause will likely see a slowdown of investment as private equity firms reassess the behavioral health market. He expects that coming to terms with some of the tougher realities of behavioral health will put an emphasis on care outcomes.
There is similar shakeup talk in the digital health space. Part of the explosion of capital in that space created duplicated services and many point solutions. This could enable wide consolidation as well-capitalized companies seek to add scale or try to diversify offerings.
Along those lines, Donovan expects the shake-out period to push more deal activity. That deal activity could have relieved some pressure on the workforce issues behavioral health operators face.
“Do we need 10 companies that are effectively doing the same thing in a certain niche? Probably not,” Donovan said. “I think a lot of the labor problems that are out there now can be solved to some extent by horizontal M&A activity.”