Private Equity and ABA

If you’re a Board Certified Behavior Analyst (BCBA)who works in the Autism field, chances are high that you’ve heard about private equity: The evil tyrant dominating our field and scooping up all of our privately-owned ABA (Applied Behavior Analysis) clinics. But what exactly is Private Equity? And how does it affect our field?

What is Private Equity?

According to Entrepreneur.com, “private equity is a general term used to describe all kinds of funds that pool money from a bunch of investors in order to amass millions or even billions of dollars that are then used to acquire stakes in companies.”

Put simply, private equity is when groups of investors team up to buy and run companies. These investors could be big institutions or wealthy individuals. They might buy all of a company or just a part of it. Usually, they don't invest in companies that are still traded on the stock market. Instead, they focus on buying private businesses.

When a private equity firm buys a company, it can either help the company become stronger and more competitive, or it might burden it with too much debt. It all depends on how good the private equity firm is at managing and what goals they have.

One controversial aspect of Private Equity is what is called carried interest. Carried interest is like a bonus that investment managers get when they make money for their investors. It's usually a percentage of the profits the investors make from their investments. So, if the investment managers do well and make a profit, they get a share of that profit as a reward. It's a way to motivate them to work hard and make smart investment decisions.

The key, though, is carried interest is taxed as capital gains (0%, 15%, or 20%) rather than regular income (between 10% and 37%). It’s controversial because some people think it's not fair. They argue that investment managers shouldn't pay taxes at a lower rate on this income compared to regular workers paying taxes on their salaries. Critics say that since this income is earned through investments, it should be taxed as investment income rather than at the lower capital gains tax rate. This controversy often sparks debates about tax fairness and income inequality.

The Ugly Side of Private Equity

Private Equity gets a bad rap because “according to researchers at California Polytechnic State University, roughly 20% of large companies acquired through leveraged buyouts go bankrupt within ten years, as compared to a control group’s bankruptcy rate of 2% during the same time period” (Institutional Investor).

Basically, 1 out of every 5 companies bought by a PE firm goes bankrupt within 10 years.

According to New York Times, ”Companies bought by private equity firms are far more likely to go bankrupt than companies that aren’t. Over the last decade, private equity firms were responsible for nearly 600,000 job losses in the retail sector alone.”

What’s the reason behind these stats?

• Excessive Cost Cutting: Private equity firms may implement aggressive cost-cutting measures to improve profitability and meet financial targets. However, if these cost reductions compromise the quality of products or services or hinder the company's ability to innovate and compete effectively, it can lead to a decline in revenue and market share, ultimately resulting in bankruptcy.

• Strategic Mismanagement: Sometimes, private equity firms may focus more on short-term financial gains, such as extracting dividends or selling off assets, rather than investing in long-term growth and sustainability. This lack of strategic vision and investment in core capabilities can weaken the company's competitive position and lead to bankruptcy in the long run.

What does this have to do with ABA?

PE firms are interested in acquiring ABA clinics because these clinics often have stable revenue streams and predictable cash flows. ABA therapy is in demand for individuals with autism spectrum disorder, and these clinics can generate consistent income from insurance reimbursements or direct payments from clients.

Additionally, the fragmented nature of the ABA market presents opportunities for consolidation, which can lead to operational efficiencies and increased profitability. By acquiring multiple clinics and integrating them into a larger network, private equity firms can scale the business more efficiently and potentially increase its value.

The growing awareness of the effectiveness of ABA therapy and the increasing prevalence of autism spectrum disorder have made ABA clinics attractive investments for private equity firms looking to capitalize on the demand for specialized healthcare services.

According to cepr.net, “private equity firms are now the dominant owners of for-profit ABA chains in the autism services segment, with roughly 135 private equity firms currently active.” This study also cites some of the largest ABA companies that have been acquired by PE firms, including: Action Behavior Center, Autism Learning Partners, BlueSprig Pediatrics, Caravel Autism Health, CARD, Centria Healthcare, Hopebridge Autism Therapy, Invo Healthcare Associates, Kadiant, LEARN Behavioral, SC Early Autism, and Stepping Stones Group. In total, there are 1,526 active ABA companies across the United States that fall under those 12 names.

When it comes to PE-owned ABA companies, here are some practices you may see that are, well, less than ideal if you prioritize ethics and quality of care:

• They may maintain reimbursement rates (aka what insurance companies pay them) but reduce costs by increasing the number of clients each BCBA has (increasing from the recommended 1:10-15 to 1:25-40).

• They may standardize treatment plans, rather than allowing BCBAs to individualize them, as our ethics code requires.

• They may require clients to come in for more hours than is medically necessary.

• They may prioritize clients who have more severe needs and require longer hours.

Where to Go Next

Frankly, where I have a hard time with all of this is my own experience. I’ve worked at 3 different ABA companies throughout my career— two of them were privately owned, and the one I’m currently at is PE-owned. Here’s my experience:

• Company 1: Small, Privately-Owned. My time there can be characterized by some, erm, creative billing. No one can convince me my boss cared about the kids over the money. A few years after I left, she sold to a PE firm.

• Company 2: Large, Privately-Owned. I honestly loved this company for the majority of the time I was there. I would have happily spent my entire career there. Unfortunately, new leadership took charge and they, too, started acting as though they cared more about money than kids.

• Company 3: PE-Owned. For all the horror stories I’ve heard about PE-owned ABA companies, the leadership here genuinely cares more about the kids and the staff than they do the money, and it shows. It’s breaking my brain a little bit, but I’m thankful.

It’s easy to focus on the ugly side of Private Equity, and to be honest, there’s a LOT on that side. But we can also see that while 1 in 5 PE-owned companies go bankrupt, 4 in 5 don’t. And perhaps that can give us some hope?

Maybe, just maybe, Private Equity isn’t the end of ethics in our field. Maybe there are still some good investors out there who care about the quality of services in the companies they buy.
And maybe, with greater awareness and advocacy, private equity investors can be encouraged to prioritize ethical practices and the well-being of individuals with autism within the companies they acquire.

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For a much deeper and more data-intensive dive into PE and ABA, I highly recommend this report, which I referenced several times throughout this article.