After several years of rapid growth, behavioral health dealmaking slowed down in 2023—but not across the board. While most segments saw a sharp drop in transactions, one area bucked the trend: outpatient behavioral health. Partial hospitalization programs (PHPs), intensive outpatient programs (IOPs), and counseling services accounted for a record 17 deals last year, making outpatient care the most active space in Behavioral Health Investment Trends.
This uptick isn’t surprising. Outpatient substance use disorder (SUD) treatment continues to grow in popularity for several key reasons. It’s more affordable for patients and payers alike, easier for providers to scale, and often faster to implement compared to inpatient or residential models. In a year plagued by economic uncertainty, those qualities made outpatient care the most attractive option for investors and buyers focused on Behavioral Health Investment Trends.
“Every other segment is in a significant downswing,” said Dexter Braff, president of The Braff Group, at Behavioral Health Business’s VALUE conference. “It will be interesting to see if we see that again this year. We should, because that’s where the activity and interest from payers is at.”
Understanding the Behavioral Health M&A Slowdown
According to a recent report by The Braff Group, behavioral health M&A has been in a prolonged slump for the past 18 months. Each quarter of 2023 showed sluggish activity, though not necessarily due to a lack of interest in behavioral health as a sector. Instead, macroeconomic conditions appear to be the main culprit behind shifting Behavioral Health Investment Trends.
High interest rates, inflationary pressure, ongoing staffing shortages, and geopolitical unrest in regions like Eastern Europe and the Middle East have created a complex environment for dealmaking. Buyers have become more cautious, and lenders more conservative. These headwinds have made it more difficult to finalize deals—even in sectors where demand remains strong.
Outpatient Care: A Bright Spot in a Cloudy Market
Despite these challenges, outpatient mental health and SUD services stood out as a rare area of growth. In mental health specifically, 11 more deals were completed than in SUD, bringing mental health ahead in overall transaction volume. However, outpatient-focused strategies drove much of the dealmaking in both sectors, a key highlight in Behavioral Health Investment Trends.
Braff described outpatient mental health as “one of the few areas that is still in what we call the positive zone.” The combination of recurring revenue, high demand, and operational flexibility continues to make outpatient models attractive to both private equity firms and strategic buyers tracking Behavioral Health Investment Trends.
Still, there are signs that future mental health deal flow could face some limitations. The behavioral health market has often been described as fragmented, with many providers operating only one or two locations. As larger multi-site providers get acquired, the pool of viable targets is shrinking, making it harder to find scalable mental health businesses.
The Curious Case of Severe Mental Illness
While many buyers are hesitant to enter the severe mental illness (SMI) space—citing concerns about patient acuity, liability, and operational complexity—this segment may actually offer untapped opportunity. According to Braff, it’s one of the few areas with high margins, strong payer interest, and limited competition.
“For those of you who like to zig when the market zags, severe mental illness is an open window right now,” Braff said.
Lyra Health is a notable example of a company moving in this direction. The digital behavioral health provider recently launched a multipronged offering specifically designed to support individuals with complex mental health conditions. Moves like this may signal a shift in Behavioral Health Investment Trends toward higher-acuity services.
Cross-Segment Deals Still Face Barriers
Despite growing awareness of the need for integrated care—especially for patients with both mental health and substance use disorders—cross-segment M&A remains rare. According to SAMHSA, more than 21 million American adults live with co-occurring disorders. Yet, 2023 saw little movement toward deals that bridge segments.
Barriers include operational differences, cultural silos, and low investor interest. Most notably, private equity—which has driven over 60% of behavioral health deals since 2018—prefers to stick with narrow, clearly defined verticals. This preference continues to shape Behavioral Health Investment Trends, pushing buyers toward safer, more scalable models.
Braff noted that integrated care is better suited for organizations building those models from scratch, rather than trying to combine disparate service lines through acquisition.
Autism and IDD: Flat and Falling
Other behavioral health segments struggled to generate interest in 2023. Intellectual and developmental disability (IDD) deals remained flat, while the autism care market continued its sharp decline from its 2019 peak.
Braff attributes the slowdown in autism deals to failed consolidation efforts and growing reimbursement challenges. These concerns have had a chilling effect on dealmaking and continue to influence Behavioral Health Investment Trends.
A Mixed but Promising Outlook for 2024
Despite the sluggish performance in 2023, the outlook for 2024 appears more favorable. Key macroeconomic pressures—like inflation and interest rates—are starting to ease. Staffing shortages remain, but have improved, and the Federal Reserve has signaled potential rate cuts.
Additionally, digital behavioral health may get a boost from new telehealth regulations that increase access and reimbursement. Combined with a narrowing valuation gap between buyers and sellers, these developments could spur a modest rebound in M&A activity, especially in outpatient sectors central to Behavioral Health Investment Trends.
One cautionary note is the potential for regulatory delays. Thirteen states now require pre-transaction notifications for healthcare deals, and more are expected to follow. This may lengthen deal timelines and create new risks for sellers.
“From a seller’s perspective, nothing good happens between the signing of a letter of intent and closing,” Braff said. “If your revenues go up, the buyers don’t raise the purchase price. But if something bad happens, they lower it or they leave.”
Final Thoughts
While 2023 was a challenging year for behavioral health M&A, the strength of outpatient care demonstrates that value still exists for savvy investors. PHP, IOP, and counseling services stand out in Behavioral Health Investment Trends, offering scalable models that balance affordability, flexibility, and patient access.
As the market evolves, players who can adapt to macroeconomic changes, regulatory shifts, and payer preferences will be best positioned to lead in 2024 and beyond. Whether you’re a strategic buyer, private equity firm, or founder seeking an exit, keeping a close eye on Behavioral Health Investment Trends is more important than ever.
