Industry Overview

M&A activity within the behavioral healthcare services sector has grown in response to the escalating demand for mental and behavioral health services in the US. In 2022, this industry registered a 45% increase compared to the previous year and maintains its rapid pace in early 2023.

In the past few years, there has been an increasing awareness of mental health issues, and post-pandemic the stigma related to mental health help has decreased significantly. 98% of Americans say COVID-19 affected their mental health, and it is reported that $1T is lost in productivity worldwide due to depression and anxiety. With the reduced stigma, more people started seeking help, which has caused a shortage of supply of professionals and institutions specialized in behavioral health.

74 million American adults have been diagnosed with a serious mental illness and substance abuse, and are receiving treatment through a broad network of facilities. Between August 2021 and February 2022, 65% of organizations turned away patients. Currently, more than half of adult individuals diagnosed with mental health illness are not being treated, and only 27% of younger patients are receiving consistent care.

The popularity of outpatient behavioral healthcare services has skyrocketed owing to their accessibility and cost-efficiency compared to inpatient settings. With an increasing number of patients seeking assistance for mental and behavioral health issues, the need for outpatient services is on the rise. Investors are particularly drawn to comprehensive outpatient services encompassing individual and group therapy, medication management, and community-based support.

Besides private equity firms, strategic buyers such as healthcare systems and payers are also interested in the behavioral healthcare services market. Their aim is to diversify revenue streams and broaden their offerings to meet the escalating demand for mental and behavioral health services. Key drivers for this surge in M&A activity include regulatory changes, high costs of inpatient care, the move toward integrated healthcare models, technological advancements, disruptive delivery models, and a patient-centric approach. Companies aiming for competitive advantages in patient care, cost savings, talent recruitment, and improved delivery models are sought after in these acquisitions.

Furthermore, increasing access to behavioral health with improved insurance reimbursement coverage and rates is creating new opportunities for investment that were previously out of reach for strategic players. According to a Statista’s report, in 2021, less than 10% of U.S. adults who seeked mental health support did not have any insurance coverage. Insurance plans may restrict the number of therapy sessions covered in a period of time, or ask for a referral document explaining the reasons for the treatment, but they are not allowed to deny coverage once it's proven the patient needs assistance. As the chart below demonstrates, the cost of a therapy session is significantly lower with the use of insurance, this allows patients to have more frequent sessions. Using the numbers from the chart, by using an in-network therapist, the patient would need four sessions to reach the cost of one single session without insurance coverage. Future market projections indicate significant revenue growth in global behavioral health, with outpatient counseling services projected to be the most profitable.

Federal Funding

Recent federal funding and investments aimed at broadening coverage and access to critical services have further fueled M&A activity in the behavioral healthcare services sector. In March 2022, the US House of Representatives approved a $1.5 trillion spending package inclusive of financial programs to expand mental healthcare. Notably, the package allocated $2.14 billion to the National Institute for Mental Health (NIMH) to intensify research on the pandemic's impact on mental health, marking a $37 million increase from 2021. At the state and local levels, the package allocated $857 million to the Mental Health Block Grant, specifically addressing gaps in mental healthcare. States are also mandated to allocate at least 5% of their block grant funds to mental health services.

M&A Activity

Within the behavioral health space, the mental health and substance use disorder (SUD) treatment segments have been significant drivers of growth. 2021 was the peak deal year, with the behavioral health sector seeing 267, a growth of 38.34% over 2020. This heightened consolidation has been driven by both strategic buyers and private equity-backed firms looking to expand the continuum of care by offering bundled treatment options that can adapt to patients' needs. This growth has outpaced other segments of healthcare, including home health and hospice, home medical equipment, healthcare staffing, and pharmacy services.

Deals slowed to 207 in 2022. In 2023, YTD (Q3 2023) deals were 154. The slower deal pace was driven by higher interest rates and lower PE activity. According to the Braff Group, while the annual number of deals within the SUD sector remained steady in the past three years, the at risk youth and intellectual and developmental disabilities markets registered a more relevant decrease in deal numbers in the same period. Specifically for the third quarter of 2023, the intellectual and developmental disabilities industry saw fewer deals possibly as a consequence of the bankruptcy filing of CARD, the biggest player in the autism services market along with a $25 million offer to purchase the company by its previous CEO, Doreen Granpeesheh, significantly lower than the $600 million estimated purchase price paid by Blackstone five years ago.

As of the third quarter of 2023, behavioral health deals were divided in the following way:

Mental health: 37%
SUD: 29%
Intellectual and developmental disabilities: 29%
At risk youth: 4%
Acquired brain injury: 1%

The decline in M&A transactions is not exclusive to mental health care services. Global M&A hit $1.95 trillion through Q3 2023 which is down 27% over the same period in 2022. The surge in record-breaking deal activity and pricing during 2021 and the initial half of 2022 left buyers vulnerable to adverse shifts in the broader economic landscape. These unfavorable changes arrived in successive waves: inflation, rises in the Federal Funds Rate to counter inflation (resulting in heightened capital expenses and concerns about an impending recession), pervasive shortages in staffing, and turmoil in Eastern Europe leading to further supply chain uncertainty.

Behavioral Health Deal Trends

Private Equity Investment Trends in Behavioral Health

Relevant Transactions

Sanders Capital Partners, a real estate investment firm, purchased the Pima Transitional Living Facility in Tucson, Arizona, on Oct. 9, 2023, for $8.4 million. This facility, spanning 14,506 square feet, operates as an inpatient behavioral health center under the management of America’s Rehab Campuses (ARC), an Arizona-based provider specializing in addiction treatment services.

Childhaven and the Washington Association for Infant Mental Health have joined forces to establish a center focused on developing the infant and early childhood mental health workforce. Alongside this, Daybreak Health secured a $10 million Series A round, strengthening its provision of online mental health services in collaboration with school districts. Additionally, Headspace, the digital health platform offering mental health services, received a $105 million senior debt facility from Oxford Finance, facilitating the expansion of its mental health services.

Implications for Strategic Players

Rising interest rates have led to a slowdown in private equity (PE) deals, bringing valuations of PE-backed transactions to more down-to-earth levels. At the same time, the industry is poised for significant growth due to increased demand for services and favorable insurance reimbursement conditions. Taking advantage of more reasonable valuations, we expect that mergers and acquisitions (M&A) among industry players will accelerate, becoming a major driver of value creation. This increase in M&A activity is likely to result in better patient care, cost savings, improved access to talented recruits, and more effective delivery models.

Behavioral Health Industry Report