As the behavioral health industry navigates 2024, it’s clear that growth will look very different from the boom years that preceded it. The rapid expansion driven by mergers and acquisitions (M&A) is slowing, and the once-popular mindset of “growth at all costs” is now considered outdated. With a focus on financial health, sustainability, and strategic expansion, behavioral health providers are embracing a new path—one rooted in organic growth in behavioral health.
The industry’s shift is a direct response to several key challenges, including high rates, ongoing labor shortages, and a tightening financial environment. These factors have caused many organizations to rethink their approach to scaling. Where M&A once dominated the landscape, the emphasis has now shifted toward targeted, sustainable growth that focuses on building a strong foundation.
The End of the ‘Growth at All Costs’ Era
At the Behavioral Health Business’ INVEST event, Danish Qureshi, president and COO of LifeStance Health, laid out the new industry landscape: “The era of growth at all costs is over.” LifeStance, a company that has grown rapidly since its founding in 2017, has scaled to 600 care centers across 34 states. Yet, despite its history of acquisitions, the company is now prioritizing a more calculated approach to growth. Instead of seeking acquisitions for the sake of size and speed, LifeStance is focusing on improving profitability and top-line EBITDA, a strategic pivot that underscores a broader shift in the industry toward organic growth in behavioral health.
Qureshi’s sentiment reflects a larger trend in behavioral health. The once common practice of acquiring companies for rapid expansion has come to a halt as external market factors, including the rising cost of capital and workforce challenges, make such growth strategies less viable. In the wake of these changes, providers like LifeStance are looking inward, focusing on strengthening their existing operations, optimizing their clinical offerings, and ensuring their financial models are robust before considering new acquisitions. Organic growth in behavioral health is now considered the more sustainable, long-term approach.
A Renewed Focus on Organic Growth and De Novo Expansion
Instead of chasing acquisitions, many companies are now turning to de novo expansion—opening new facilities from the ground up using internal cash flow rather than borrowed capital. This shift in focus is partly due to the economic pressures that have made M&A deals more expensive and difficult to execute. For LifeStance, which has completed nearly 100 acquisitions over the past six years, the company is now embracing a more organic growth strategy. The focus has moved from adding new locations through acquisitions to growing its existing base through de novo projects.
“From our standpoint and our private equity sponsor’s, we’re very focused on the de novo,” said Brent Turner, CEO of Summit BHC. Summit, a behavioral health company providing substance use and psychiatric services, operates 35 facilities across 19 states. The company is backed by Patient Square Capital and is shifting its strategy to favor organic growth in behavioral health funded by cash flow rather than external financing. “It’s not even a decision tree; it’s just natural,” Turner explained, reflecting the ease with which Summit is making this shift.
This organic growth in behavioral health enables providers to retain control over their growth trajectory and build services that are more closely aligned with their mission. It also provides a buffer against the challenges posed by high-interest rates and labor shortages, both of which make large-scale acquisitions more difficult to pull off in the current environment.
Investment Trends: A Cautious, Quality-First Approach
On the investment side, behavioral health is still considered a bright spot, though the landscape has shifted dramatically. On both the private equity (PE) and venture capital (VC) sides, investors are becoming more conservative. In 2023, the number of platform-driven deals in the PE space plummeted, and digital health investment, though still significant, is at a multi-year low. However, the focus has shifted toward ensuring that companies have a strong clinical foundation and a proven, sustainable model for growth.
As John Peloquin, president and CEO of Discovery Behavioral Health, noted at INVEST, investors are no longer looking to spend aggressively on companies that simply promise growth. “Now you see more and more [private equity firms] coming in requiring more and more of a positive clinical foundation—not the ‘we’re just going to spend a lot of money, we’re going to roll it up, and then we’re going to sell those’ mentality,” Peloquin said. This shift is indicative of the changing investor attitude, which now favors companies with a strong clinical track record, operational efficiency, and clear pathways to organic growth in behavioral health.
For Discovery, which has been in business since 1985 and operates 150 facilities across 16 states, the emphasis on organic growth in behavioral health has long been the core strategy. In fact, only 12 of its locations have been opened through acquisitions. Peloquin emphasizes that the company’s goal when entering a new market is not just to expand but to offer a comprehensive range of services—substance use, mental health, psychiatric, and eating disorder treatment. While tuck-in acquisitions still play a role, the company’s growth strategy is primarily driven by developing services organically rather than relying on external deals.
The Challenges of M&A in the Current Climate
For many providers, including LifeStance, the days of aggressive M&A activity are on hold. The interest in acquisitions is not gone forever, but for now, many companies are adopting a wait-and-see approach. “We think it’s the right time to focus on de novo growth to make sure that we have our foundation in a place where we feel really good,” Qureshi said. LifeStance, which previously used M&A to rapidly scale, is now concentrating on ensuring that its current business structure is solid and well-positioned for sustainable growth. The company plans to re-enter acquisitions when the market conditions are more favorable, but for now, the focus is squarely on organic growth in behavioral health.
This strategic pause on M&A also allows companies to address integration challenges that arise from acquiring different companies. LifeStance, which has integrated 100 new companies over the past few years, acknowledges that such acquisitions require significant time and effort to align cultures, processes, and teams. While the rapid scaling of the past served LifeStance well, the company recognizes that creating long-term value requires a more thoughtful approach to growth.
Looking Ahead: A Shift Toward Sustainable, Organic Growth
As providers like LifeStance, Summit BHC, and Discovery Behavioral Health embrace the organic growth in behavioral health approach, it’s clear that the focus on organic, sustainable growth is here to stay. The demand for behavioral health services remains strong, and there is no doubt that the market for these services will continue to grow. However, providers are now taking a more measured approach, focusing on strengthening their operational foundations and building scalable models that will enable them to thrive over the long term.
In this new landscape, providers who can effectively navigate economic challenges, leverage organic growth, and remain focused on delivering high-quality care will be best positioned for success. The era of unchecked expansion may be over, but the future of behavioral health growth is still bright—it’s just a little more focused, a little more strategic, and a lot more sustainable.
