In a bold and decisive move, Discovery Behavioral Health, a diversified behavioral health provider based in Irvine, California, is undergoing a major transformation aimed at retooling its operations in response to significant market pressures. As part of this restructuring, the company has closed or consolidated approximately 14 to 16 locations, signaling a strategic shift away from traditional residential care. This change comes as Discovery Behavioral Health moves to embrace a more efficient, consumer-driven approach, with a stronger emphasis on outpatient services, telehealth, and outcomes tracking. This shift aims to create a more sustainable and scalable model that addresses the evolving needs of patients while navigating the increasing financial challenges faced by healthcare providers across the nation. This is a direct response to the Behavioral Health Industry Transformation that is reshaping the landscape of care.
Rising Financial Pressures Prompt Strategic Re-evaluation
At the heart of this retooling effort is the economic reality that healthcare providers like Discovery Behavioral Health are facing today. CEO John Peloquin highlighted the driving forces behind these changes, noting the significant imbalance between rising costs—especially labor costs—and the stagnant reimbursement rates from payers. This imbalance has made it increasingly difficult for providers to sustain traditional service models, particularly those that rely heavily on small, residential care facilities that are not as financially viable in today’s market. According to Peloquin, the challenge lies in the fact that payers have been slow to adjust reimbursement rates to match the rate of inflation and the rising cost of doing business. As a result, Discovery has found itself needing to become more efficient, particularly in its approach to residential care.
The company’s residential treatment centers, once a hallmark of Discovery Behavioral Health’s offerings, have come under scrutiny due to the rising operational costs associated with maintaining these facilities. With interest rates climbing and labor costs continuing to rise, smaller residential programs—such as those following the six-bed model—have become increasingly unsustainable. Peloquin explained that maintaining such small facilities requires near-perfect occupancy rates to remain financially viable. Even a slight drop in patient census can cause operating costs to become disproportionately high. This, in turn, has made it necessary for Discovery Behavioral Health to consolidate locations and move away from its traditional six-bed residential treatment centers in favor of more cost-efficient outpatient care models. This pivot reflects the broader Behavioral Health Industry Transformation, where larger, more efficient care models are gaining traction.
A Shift Toward Outpatient Services and Telehealth
One of the central tenets of Discovery Behavioral Health’s new strategy is a heightened focus on outpatient services and telehealth. This shift aligns with broader industry trends that emphasize the growing importance of consumer-direct care. As part of this reorientation, Discovery Behavioral Health launched DiscoveryMD in February 2022, a brand focused on outpatient mental health services, particularly for treatment-resistant depression. Through this new platform, Discovery aims to provide accessible, cost-effective care that allows patients to receive treatment without the need for residential stays. This consumer-driven approach leverages telehealth to reach more patients and streamline care delivery, offering flexibility and convenience for individuals who may not need or want residential treatment.
Telehealth, in particular, has emerged as a critical component of the company’s strategy to provide more accessible care. By embracing virtual care, Discovery can serve a broader patient base while reducing the operational costs associated with running physical treatment centers. With telehealth, patients can receive services in the comfort of their own homes, which not only improves convenience but also reduces barriers to care, especially for those living in remote or underserved areas. The ability to provide treatment remotely has become an essential part of Discovery’s pivot to a more sustainable, patient-centered approach to behavioral health. This is a key aspect of the ongoing Behavioral Health Industry Transformation that prioritizes more accessible care through digital platforms.
In addition to outpatient services and telehealth, Discovery Behavioral Health has integrated outcome-tracking and measurement-based care into its treatment approach. This is a critical move toward improving the quality of care and ensuring that patients are receiving the most effective treatments. In September, Discovery announced a partnership with Videra Health and Brigham and Women’s Hospital to create Discovery365, an innovative program that uses AI-backed video analysis and recovery tracking to support patients throughout their treatment and for up to a year after discharge. By tracking patient progress in real-time, Discovery hopes to reduce the risk of relapse and improve long-term outcomes, ultimately fostering a more successful treatment process for individuals battling mental health and substance use disorders. This initiative is a direct result of the Behavioral Health Industry Transformation, which is leaning heavily into technology and measurable outcomes to enhance care delivery.
The End of the Six-Bed Residential Model
Discovery Behavioral Health’s decision to pivot away from its legacy six-bed residential care model is perhaps the most significant change in the company’s approach. For years, the company marketed its residential treatment centers as “beautiful, homelike environments” designed to provide a comfortable, intimate setting for clients. Many of these centers were housed in large, luxurious homes, particularly through brands like the Discovery Mood & Anxiety Program and Center for Discovery. These six-bed facilities, which were often marketed as more personal and therapeutic, have become increasingly inefficient in light of the financial pressures affecting the behavioral health industry.
As Discovery moves away from the six-bed model, it is focusing on larger, more efficient treatment centers that can accommodate more patients at a lower cost per patient. The company’s historical reliance on small residential facilities has proven to be unsustainable, particularly when operating costs are so high. For example, Discovery’s facilities in markets where the company doesn’t have a strong presence or where demand for services is lower can become a financial drain. With small residential homes, the cost of operations remains fixed, regardless of the number of patients served. If a facility’s census drops below capacity, the operating costs remain the same, putting the facility in a precarious financial position. This is part of the broader Behavioral Health Industry Transformation, as organizations seek more scalable and sustainable care models.
Discovery’s six-bed model also requires a near-constant flow of patients to remain financially viable. If occupancy dips even slightly, the facility’s operating costs can quickly become unsustainable. These small, high-maintenance facilities have proven difficult to manage in the current economic climate, especially given the rising labor costs and inflation. In many cases, this has led to the closure of smaller residential locations or their conversion into more efficient treatment centers. This reflects the broader trend in the Behavioral Health Industry Transformation, where smaller, more personalized care models are being replaced by larger, more efficient ones.
Strategic Closures and Consolidations
To strengthen its balance sheet and optimize its operations, Discovery Behavioral Health has been closing or consolidating locations in markets where it does not have a strong presence or where smaller facilities are not financially viable. In 2023, the company expanded its footprint in key markets by adding eight new locations through its Center for Discovery and Discovery Mood & Anxiety Program brands. However, Discovery has also taken steps to close or consolidate underperforming facilities, particularly those in markets where the company faces significant competition or has lower market penetration.
While the company has not disclosed the specific locations affected by these closures, Peloquin noted that between 14 and 16 locations have been impacted by the consolidation process, which represents about 10% of Discovery Behavioral Health’s total footprint. The closure of these facilities is part of Discovery’s broader strategy to focus on larger, more efficient treatment centers in markets where the company already has a strong presence or where demand for services is higher. In some cases, Discovery may repurpose the closed locations for different service types, further optimizing its use of resources and expanding the range of care it provides. This strategy reflects the broader Behavioral Health Industry Transformation, where efficiency and market-driven decisions are becoming central to company operations.
A Look Ahead: Strengthening Discovery’s Position for the Future
Discovery Behavioral Health’s decision to streamline its operations and reorient its services represents a broader trend in the behavioral health industry. As market pressures continue to mount, companies like Discovery are finding it necessary to adapt their business models to remain financially sustainable while continuing to provide high-quality care. By moving away from small, costly residential facilities and focusing on outpatient services, telehealth, and outcome-tracking initiatives, Discovery is positioning itself to thrive in a rapidly changing healthcare landscape. This shift is a clear example of how the Behavioral Health Industry Transformation is reshaping how care is delivered.
This strategic shift is not just about cutting costs—it’s also about improving the quality of care and outcomes for patients. With the integration of telehealth, measurement-based care, and innovative initiatives like Discovery365, Discovery Behavioral Health is taking proactive steps to improve patient outcomes while ensuring long-term sustainability. As the behavioral health sector continues to evolve, Discovery’s focus on efficiency, patient-centered care, and cutting-edge treatment options could serve as a model for other organizations navigating similar challenges.
In conclusion, Discovery Behavioral Health’s transformation is a clear reflection of the broader shifts occurring within the healthcare industry. By adapting to market pressures and embracing new technologies and treatment modalities, Discovery is setting itself up for success in the future of behavioral health care, embodying the ongoing Behavioral Health Industry Transformation.
