Several regulatory and macroeconomic shifts created a new era of heightened scrutiny in behavioral health investing.

Higher interest rates, workforce challenges and inflation have made investors and acquisitive companies more thoughtful about where they place their bets. On top of the market force headwinds, the Biden administration and some state governments have signaled that they will put greater scrutiny on health care M&A.

Over the last two years, deal volumes have fallen, reflecting a much more conservative approach to growth in behavioral health. As a part of that, buyers in the behavioral health space are adding to and being more thorough in their reviews of target companies, according to Bragg Hemme and Paul Gomez, co-chairs of the behavioral health law group at the law firm Polsinelli.

“It’s not the end of the world, as always — you will find ways to deal with it,” Gomez said. “But you have to be mindful of the increased scrutiny on health care and behavioral health at the federal and state levels.”

Earlier in the year, the antitrust divisions of the U.S. Department of Justice and the Federal Trade Commission withdrew their decades-old guidance on mergers in the health care space.

The federal government signals indicate a greater interest in reviewing “mergers, consolidations, and affiliations across the board and that include health care and that includes behavioral health,” Gomez said.

In the case of consolidation, this could lead to regulators reviewing a business’ acquisition history in addition to the original deal that generated the review.

“If you’re engaged in serial acquisitions, you should expect going forward … that [regulators] may be taking a look at those [previous deals] even if each singular deal was not particularly troublesome from an antitrust standpoint,” Gomez said.

Some large states are getting more into health care dealmaking regulation. These include recently passed laws in California, New York and Illinois.

Some laws only require disclosure and review, not approval, before a deal can close. However, the additional oversight may lead to administrative and timeline headaches. In the case of California, whose law takes effect in 2024, these reviews will take at least three months and may extend beyond a year.

Gomez said more state and federal reviews of health care deals may have a chilling effect on dealmaking.

There are also unsettled regulatory issues that complicate dealmaking in behavioral health. Hemme pointed to telehealth prescribing regulation and parity. Still, there’s reason for optimism on these fronts in the future.

The Drug Enforcement Administration telehealth flexiblies for another year. This was a positive sign, potentially showing that the thinking of DEA leaders was softening on telehealth and behavioral health.

“I think they’re grappling with the stigma around behavioral health care generally and behavioral health care providers — that everybody that does behavioral health is over prescribing meds and all that stuff,” Hemme said. “I think that they’re hearing very loudly and clearly now that’s not the right perception. … I view [the delay] as a sign that they are listening.”

Specific to dealmaking, buyers are looking much more closely at how target companies get paid and the role of telehealth and other digital tools at a company.

Polsinelli is asking more pointed questions about payer audits and self audits of revenue cycle management. They are also looking more closely at communications from the company that might represent antitrust law violations and partnerships with outside organizations for potential False Claims Act and anti-kickback litigation exposure.