PHP Financing: What Behavioral Health Operators Should Know
Partial hospitalization programs, commonly called PHPs, can require significant capital to launch, expand, or operate. Behavioral health organizations may need financing for facilities, renovations, staffing, technology, working capital, or commercial real estate. For operators exploring behavioral health care financing, understanding the financing needs of a PHP can help with planning and growth.
What Is a Partial Hospitalization Program?
A partial hospitalization program is a structured level of behavioral health care that generally provides intensive services during the day without requiring patients to remain in the facility overnight.
PHPs can be used for mental health treatment, substance use disorder treatment, or other behavioral health services depending on the organization and applicable requirements.
The services, staffing model, schedule, and payment arrangements can vary between programs.
Why Would a PHP Need Financing?
A PHP can require substantial investment before it reaches its expected patient volume.
Financing may potentially be used for:
- Starting a new PHP
- Expanding an existing PHP
- Purchasing commercial real estate
- Facility renovations
- Leasehold improvements
- Furniture and fixtures
- Technology
- Clinical equipment
- Hiring employees
- Working capital
The amount of financing required depends on the size of the program, facility, staffing model, and overall business plan.
Starting a PHP
Launching a PHP can involve significant upfront expenses.
An operator may need to secure a facility, complete renovations, purchase furniture and technology, recruit staff, establish administrative systems, and develop referral relationships.
These costs may occur before the program generates consistent revenue.
A startup financing plan should therefore account for both the initial investment and the operating capital needed during the early stages of the business.
Expanding an Existing PHP
An established behavioral health organization may consider expanding its PHP when demand exceeds available capacity.
Expansion could involve:
- Adding treatment space
- Increasing patient capacity
- Hiring additional clinical staff
- Adding administrative employees
- Expanding service offerings
- Moving into a larger facility
- Opening an additional location
Before taking on additional debt, operators should evaluate whether current demand, cash flow, and staffing resources can support the expansion.
Facility Financing Can Be Important
The facility may represent one of the largest expenses associated with operating a PHP.
Costs can include:
- Lease deposits
- Construction
- Leasehold improvements
- Treatment rooms
- Office space
- Furniture
- Technology infrastructure
- Security systems
A detailed facility budget can help an operator determine the total amount of capital required.
Can You Finance Commercial Real Estate for a PHP?
Some behavioral health operators may choose to purchase the commercial property where their PHP operates.
Commercial real estate financing may potentially be available for qualifying properties and borrowers.
Owning the property can give an operator greater control over the facility and provide a long-term business asset.
However, purchasing real estate also creates additional responsibilities, including property maintenance, taxes, insurance, and mortgage payments.
Staffing Costs Should Be Included in the Financial Plan
PHPs can require a multidisciplinary team of qualified professionals and support staff.
Depending on the program, staffing may include therapists, counselors, psychiatric professionals, medical staff, administrative personnel, billing employees, and management.
The cost of recruiting and retaining these employees should be included in financial projections.
Operators should also consider the timing of hiring because staff may need to be added before the program reaches full capacity.
Working Capital for PHPs
Working capital can help a PHP manage normal operating expenses while revenue is being generated and collected.
Expenses may include:
- Payroll
- Rent or mortgage payments
- Utilities
- Insurance
- Marketing
- Technology
- Administrative expenses
- Professional services
Working capital can be particularly useful during a startup or expansion when expenses may increase before revenue reaches its expected level.
Payer Mix Can Affect Cash Flow
PHP revenue may come from different sources depending on the services offered and the organization’s payer relationships.
Potential sources can include commercial insurance, Medicaid, Medicare where applicable, self-pay patients, and other arrangements.
Payment rates, eligibility requirements, billing procedures, and collection times can vary.
Operators should therefore understand their payer mix when preparing financial projections and evaluating how much financing the business can reasonably support.
Revenue and Cash Flow Are Different
A PHP may report substantial revenue while still experiencing cash-flow pressure.
Claims may take time to process and collect, while payroll, rent, insurance, and other operating expenses generally need to be paid on schedule.
For this reason, operators should monitor accounts receivable and collection trends rather than relying solely on reported revenue.
How Lenders Evaluate PHP Financing
For an established organization, lenders may review both the existing business and the proposed PHP project.
Factors may include:
- Historical revenue
- Profitability
- Cash flow
- Existing debt
- Credit history
- Liquidity
- Payer mix
- Accounts receivable
- Operating history
- Management experience
The lender may also evaluate whether the proposed PHP is expected to generate sufficient revenue to support the additional financing.
Can an Existing Behavioral Health Organization Finance a PHP?
An established behavioral health organization may be in a different financing position from a new operator.
An existing business may already have financial statements, established staff, referral relationships, operating systems, and a track record of generating revenue.
Those factors can provide lenders with additional information when evaluating a proposed PHP expansion.
However, the new program still needs a realistic financial plan.
PHP Financing for a New Location
Opening a PHP at another location can require more than simply finding additional office space.
The operator may need to fund:
- Real estate or lease costs
- Renovations
- Furniture
- Technology
- Staffing
- Marketing
- Administrative infrastructure
- Working capital
A new location may also take time to build patient volume.
The financing structure should account for the expected ramp-up period rather than assuming immediate full utilization.
How Much Can You Borrow for a PHP?
There is no universal financing amount for every PHP.
Borrowing capacity may depend on:
- Revenue
- Profitability
- Cash flow
- Existing debt
- Credit history
- Liquidity
- Project cost
- Management experience
- Collateral
- Expected future performance
The amount requested should correspond to the actual capital requirements of the project.
SBA Financing for PHPs
SBA financing may be an option for qualifying behavioral health businesses and eligible uses of funds.
Depending on the transaction, SBA financing may potentially support real estate, improvements, acquisitions, equipment, or other qualified business expenses.
Eligibility depends on the borrower, business, intended use of proceeds, and applicable lender requirements.
Conventional PHP Financing
Established behavioral health organizations may also consider conventional business financing.
Conventional financing can potentially be used for expansion, real estate, refinancing, acquisitions, or other business purposes depending on the lender and transaction.
An established organization with consistent financial performance may have additional financing options compared with a newly formed business.
What Documents May Be Required?
Depending on the financing request, lenders may request:
- Personal tax returns
- Business tax returns
- Profit and loss statements
- Balance sheets
- Business bank statements
- Accounts receivable reports
- Existing loan statements
- Lease agreements
- Real estate documents
- Construction estimates
- Business plans
- Financial projections
- Details regarding the use of funds
Having these documents available early can help streamline the financing process.
Build Realistic PHP Financial Projections
A PHP’s financial projections should reflect the actual operating model of the program.
Operators should consider:
- Expected patient volume
- Program capacity
- Expected reimbursement
- Staffing requirements
- Facility expenses
- Administrative costs
- Collection timing
- Marketing expenses
Projections should also account for the time required to build patient volume and establish consistent revenue.
Don’t Underestimate the Ramp-Up Period
A new PHP may take time to reach its expected utilization.
The operator may need to recruit employees, establish referral relationships, develop the program’s reputation, complete payer-related processes where applicable, and build patient volume.
Adequate capitalization can provide the business with additional flexibility during this period.
Consider the Entire Project Cost
Operators should avoid focusing only on construction or initial setup costs.
The total financing requirement may also include payroll, rent, marketing, insurance, technology, professional services, and other operating expenses.
Understanding the full project cost can help prevent the business from starting or expanding with insufficient capital.
Preparing for PHP Financing
Before approaching a lender, operators should have a clear understanding of the project and its financial requirements.
It can be helpful to:
- Review historical financial statements
- Analyze revenue and payer mix
- Review accounts receivable
- Calculate existing debt obligations
- Develop a detailed project budget
- Estimate staffing costs
- Prepare realistic revenue projections
- Organize financial documentation
A well-prepared financing request can make it easier to evaluate available options.
Final Thoughts
PHP financing can help behavioral health operators launch new programs, expand existing facilities, purchase commercial real estate, renovate treatment centers, hire staff, and support working capital needs.
The appropriate financing structure depends on the organization’s financial performance, operating model, payer mix, existing debt, project cost, and long-term plans.
By understanding the full cost of the project and preparing financial information early, PHP operators can be better positioned to evaluate financing options and pursue growth while maintaining a strong financial foundation.
