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The Regulators Stopped Watching Quietly
In March 2024, the DOJ, FTC, and HHS jointly launched a public inquiry into private equity ownership of healthcare. This was a coordinated signal that three agencies are now sharing information on the same deals, the same sponsors, and the same portfolio companies. Behavioral health was named explicitly.
Then look at California AB 3129, signed and vetoed in 2024 but already redrafted for the next session, and Massachusetts Chapter 343 of the Acts of 2024, which gives the AG and HPC expanded authority over private equity transactions in healthcare with material change notice thresholds as low as $25 million in some scenarios. New York’s Article 45-A material transaction notification took effect August 2023. Indiana, Oregon, and Connecticut all passed their own variations. The map changed in under 24 months.
If you are a sponsor or an operator and your diligence playbook still assumes a quiet HSR filing and a routine state licensure change of ownership, you are working from a 2019 map.
What Diligence Actually Has To Cover Now
A real behavioral health diligence file in 2026 looks different than it did three years ago. We are reviewing UR denial trends by payer, SIU audit history, the last three state survey reports, every CAP and its closure documentation, the ASAM Criteria 4th Edition level of care assignments versus the actual programming delivered, and the EMR audit logs. Not the policies. The logs.
Here is what kills deals at the LOI stage: a target presenting itself as a Level 3.5 clinically managed high-intensity residential program, but the chart audit shows programming hours and clinical staffing that map to Level 3.1. That is not a documentation gap. That is a billing exposure that follows the buyer post-close, and the OIG has been very clear in its 2024 and 2025 work plans that successor liability is on the table.
Payer readiness matters as much as the regulatory file. We have seen targets with $4 million to $7 million in aged AR that the seller’s QofE deck treated as collectible. It was not. Timely filing had blown on most of it.
Governance After Close Is Where Sponsors Get Burned
The corporate practice of medicine doctrine is not new. What is new is how aggressively state AGs are reading it. The Massachusetts AG’s office, the California AG’s office, and the Oregon AG have all signaled that management services agreements giving the MSO control over clinical hiring, clinical protocols, or clinical scheduling will be scrutinized. The Steward Health Care collapse in Massachusetts was the case study every state legislator now cites.
If your MSA reads like the MSO is running the clinic, you have a problem regardless of how the org chart is drawn. We rewrite a lot of these. The friction points are usually around clinical leadership reporting lines, EMR access controls, and who signs off on level of care decisions. Those have to sit with the licensed clinical entity. Full stop.
Board composition matters too. A behavioral health portfolio company with zero independent clinical voice on the board is a finding waiting to happen during the next AG inquiry or DOJ CID.
The Operating Model Has To Match the Thesis
Most behavioral health PE theses I read assume census growth, payer mix improvement, and margin expansion through shared services. Fine. But the operational backbone has to actually exist. I have walked into post-close situations where the platform had three EMRs across five sites, no unified UM workflow, and a compliance function that was one person splitting time with HR. The thesis said 40% EBITDA margin by year three. The reality was a $1.2 million remediation spend before they could even credential consistently across states.
Multi-site behavioral health does not scale on willpower. It scales on a unified intake and UM function, consistent ASAM Criteria 4th Edition application across the network, a single source of truth for credentialing, and a compliance calendar that tracks every state survey window, every accreditation cycle, and every payer audit response deadline.
If you are sponsoring or operating in this space and want to talk through what the current enforcement environment means for a specific platform, Leah Kendall and Shalini Karapetian will be at WCSAD 2026 in San Diego May 28 to 30. We are also sponsoring the South Florida Behavioral Health Coffee Morning on May 20 at Harvest Patio in Boca Raton at 10am. Come say hello.
What I Tell Sponsors Before They Sign the LOI
Three things. First, do real regulatory diligence, not a checklist. Pull the actual survey reports from the state agency. In Florida that is AHCA and DCF. In California that is DHCS. In New York that is OASAS. Read the findings. Read the CAPs. Talk to the clinical leadership without the seller’s banker in the room if possible.
Second, model the compliance and operations spend honestly. A behavioral health platform doing $30 million in net revenue across four states needs a real compliance function, a real UM function, a real revenue integrity function, and an EMR strategy. Underfunding any of these to hit a model is how you end up with a CID 18 months post-close.
Third, decide before you close whether you are building a clinically excellent platform that produces durable margin, or whether you are arbitraging reimbursement. The first one survives the next enforcement wave. The second one does not.
References
- DOJ, FTC, HHS Joint Public Inquiry into Private Equity in Healthcare (March 2024)
- HHS Office of Inspector General Work Plan
- Massachusetts Chapter 343 of the Acts of 2024: Market Review and Health Policy Commission Authority
- California Office of the Attorney General: Healthcare Transactions Oversight
- New York State Office of Addiction Services and Supports (OASAS)
- Florida Agency for Health Care Administration (AHCA)
- ASAM Criteria, 4th Edition (2023)
- Behavioral Health Business: Private Equity and Behavioral Health Coverage