In recent years, mergers and acquisitions (M&A) within the substance use disorder (SUD) treatment space have been relatively slow. However, with the anticipated shift in the political landscape towards a “business-friendly” administration, the softening of interest rates, and growing interest in digital health solutions, experts suggest that the coming years, particularly 2025, may usher in a new era of M&A activity in the sector.
For much of the last few years, the SUD treatment industry has experienced some stagnation in dealmaking. The complexities of the healthcare landscape, regulatory uncertainties, and shifting macroeconomic factors have all played a role in dampening the appetite for large-scale mergers and acquisitions. However, as new conditions evolve, many industry insiders believe that now might be the time for a resurgence in M&A, particularly in digital health.
Slow M&A Activity and Its Underlying Factors
The SUD treatment space, which includes outpatient clinics, inpatient facilities, and various other types of care, has long been a sector in need of greater consolidation. The treatment landscape is often fragmented, with many smaller regional players offering vital services. Despite this, M&A activity within the industry has been slower than expected.
One key factor contributing to this slow pace is the broader economic environment. Over the last few years, interest rates have remained relatively high, making capital more expensive for companies looking to fund acquisitions. For businesses already operating with tight margins, this raised cost of capital has made pursuing large-scale deals a less appealing strategy. Additionally, the volatility in the healthcare market, particularly surrounding insurance reimbursements, has made providers hesitant to engage in acquisitions or mergers without a clearer understanding of future regulatory shifts.
However, this trend could be on the verge of a significant change. With the upcoming transition to a new “business-friendly” presidential administration and signs that interest rates could soften, the environment for dealmaking in the SUD treatment space could improve dramatically.
The Role of a Business-Friendly Administration
Rose Bromka, the Chief Operating Officer (COO) of Boulder Care, a virtual outpatient opioid use disorder (OUD) and alcohol use disorder (AUD) treatment provider, expressed optimism about the potential for increased M&A activity in the near future. Speaking at a recent Addiction Treatment Business webinar, Bromka shared her belief that the incoming administration will likely create a more business-friendly environment, which would lower barriers to dealmaking.
Bromka’s confidence is rooted in the belief that a new administration could lead to regulatory changes that would facilitate greater investment in the SUD treatment sector. Such changes might include more relaxed regulations around acquisitions, streamlined licensure processes, and efforts to reduce red tape that has hindered sector consolidation in the past.
“Given the political landscape and lower barriers for dealmaking, I would not be surprised if we see more and more activity in the next four years,” said Bromka. “The last 12 months have been relatively quiet, but the environment is shaping up for a shift.”
The optimism surrounding a more business-friendly political environment is based not only on potential regulatory changes but also on broader trends within the healthcare industry. As enrollment in government-backed programs such as Medicare and Medicaid continues to rise, along with the increasing demand for behavioral health services, providers may find themselves seeking to expand or consolidate to meet the growing needs of their populations.
Softening Interest Rates and Their Impact on M&A
Another crucial factor influencing M&A activity is the broader macroeconomic climate. In particular, interest rates have a direct impact on the cost of capital. For the last several years, high interest rates have created headwinds for organizations that might otherwise be looking to acquire competitors or merge with larger entities.
However, there are signs that interest rates may begin to soften in the coming years, making it easier and more affordable for companies to secure financing for acquisitions. As capital becomes cheaper and more accessible, it is expected that dealmaking activity in the SUD treatment space will pick up.
When interest rates are lower, borrowing costs decrease, and private equity firms and other investors are more inclined to deploy capital. This scenario creates an environment where smaller SUD providers may look to exit by merging with larger organizations, or larger entities may actively seek out acquisitions to expand their reach and service offerings.
As Rob Marsh, CEO of Bradford Health, noted during the webinar, several smaller SUD treatment providers are actively considering exits and mergers. “I imagine we’ll see more dealmaking,” Marsh said. “Many smaller providers are looking to exit, and the conditions are ripe for consolidation. These organizations are seeking larger entities to merge with or sell to altogether.”
The Growing Role of Digital Health in SUD Treatment M&A
In addition to traditional SUD treatment centers, there is a growing interest in digital health solutions in the sector. The digitalization of healthcare has revolutionized many aspects of the industry, and SUD treatment is no exception. Virtual outpatient treatment platforms, telehealth services, and digital therapeutics are becoming increasingly popular as they offer patients convenient and scalable access to care.
This shift toward digital health has led some industry insiders to speculate that digital players could become a major focus for M&A activity in 2025. As providers in the SUD treatment space seek to expand their service lines and reduce client acquisition costs, merging with or acquiring digital health companies could offer strategic advantages.
“I think we’ll see more mergers or acquisitions of companies providing virtual, digital health solutions for substance use in those providing behavioral health to extend their service lines,” said Bob Poznanovich, Chief Business Growth Officer at Hazelden Betty Ford Foundation. “These digital solutions are becoming increasingly important as providers look to offer a more integrated suite of services.”
One example of this shift is the acquisition of virtual SUD provider Lion Rock by Brightside, a digital behavioral health startup. This acquisition allowed Brightside to expand its service offerings by adding virtual intensive outpatient programs (IOPs) for SUD patients. As digital health companies like Brightside continue to expand, there could be an increasing number of acquisitions of smaller, specialized digital health providers in the SUD treatment space.
The potential for consolidation in the digital health sector is driven by the recognition that integrating virtual care solutions with traditional treatment modalities can improve outcomes and reduce the cost of acquiring new clients. As virtual treatment becomes more widely accepted, SUD providers may look to bolster their digital offerings through acquisitions.
Challenges in the Digital SUD Space
While digital health presents significant opportunities for consolidation, there are challenges as well. One of the biggest hurdles for digital health companies in the SUD treatment space is the high cost of customer acquisition. Poznanovich noted that many digital providers are struggling to achieve profitability, with some focusing more on acquiring subscribers at any cost rather than focusing on sustainable business models.
“I remember the days of internet startups where there was a land grab for subscribers,” Poznanovich said. “But the acquisition costs for patients are unsustainable. This could slow down some of the consolidation in the digital space.”
For some digital health providers, especially those without a strong word-of-mouth pipeline like Boulder Care, acquiring new clients can be expensive. Companies that cannot reduce their customer acquisition costs may not be attractive M&A targets. As Bromka pointed out, “We’re at the precipice of seeing more of the organizations that were funded going out of business. There may be more closures than mergers.”
The Path Forward: Opportunities and Challenges in 2025
As we look ahead to 2025, the SUD treatment space is poised for potential change. If interest rates soften, regulatory environments become more business-friendly, and digital health continues to grow in importance, we may see a significant uptick in M&A activity. Providers may look to consolidate to expand their services, enhance their offerings, and reduce costs.
However, this period of consolidation will likely come with challenges. Smaller providers may face difficulty navigating the changing economic environment, and digital players will need to address the high costs associated with customer acquisition. The macroeconomic environment and the shifting regulatory landscape will continue to be key factors in determining the pace and success of M&A activity.
Despite these challenges, the outlook for M&A in the SUD treatment space in 2025 remains optimistic, with experts anticipating that the coming years will bring greater opportunities for consolidation, especially in the digital health sector. Whether through traditional providers merging with larger entities or digital health companies acquiring smaller virtual care providers, the landscape for SUD treatment is likely to evolve significantly in the near future.
