The substance use disorder (SUD) treatment landscape is undergoing a significant transformation. Contrary to popular belief, the largest patient population and the majority of funding are not concentrated in luxury rehab programs. Instead, the focus is increasingly on affordable substance use disorder treatment programs where most patients access care. This shift has not gone unnoticed by private equity (PE) firms and behavioral health operators who are actively adapting their strategies to align with these market realities.
Dexter Braff, president of The Braff Group—an M&A advisory firm specializing in behavioral health—captured the essence of this transition at the Behavioral Health Business VALUE conference. He said, “We’ve been waiting for this. We’ve been expecting it, because where’s all the money? All the money is not in a luxury program. All the money is state funded, and low and affordable private pay in the local markets where people are getting the service.”
This statement reflects a profound truth: the market’s financial pulse beats strongest in affordable substance use disorder treatment programs that serve broad patient populations, rather than in niche luxury offerings.
Affordable and Mid-Range Programs Dominate SUD Transactions
The data strongly supports this trend. According to Braff’s research, in 2021, the vast majority of SUD transactions occurred in affordable to mid-range service sectors. This represents a significant departure from the 2012 to 2016 period when high-end luxury programs dominated deal activity in the SUD space. The change is driven by evolving patient needs, reimbursement models, and an increasing demand for accessible, community-based care.
Between 2017 and 2021, there were approximately 300 deals in the SUD sector—the highest volume recorded in any behavioral health subsector during that time frame. This surge underscores the growing investor confidence in affordable substance use disorder treatment models and signals a sustained shift in focus.
Braff anticipates this trend will continue, especially in the outpatient addiction care sector. Although the expected wave of transactions hasn’t fully materialized yet, he predicts community-based services will soon experience accelerated growth. This prediction is grounded in the close kinship between mental health and substance use disorder treatment, as many mental health providers already deliver counseling services for substance abuse.
“We’ve seen some activity, but we’re expecting that the community-based services are going to jump,” Braff explained. “There’s a real close kinship to mental health.”
This convergence of mental health and addiction services within community settings represents a natural evolution of care, enabling more integrated and holistic approaches that are also more affordable.
The Role of Outpatient and Community-Based Programs in the Future
Outpatient and community-based programs have several advantages that make them appealing both to patients and investors:
- Lower Cost: Outpatient care tends to be less expensive than inpatient luxury treatment, increasing accessibility for patients and payers alike.
- Greater Accessibility: These programs can serve more patients by being located in local communities, reducing barriers related to travel or relocation.
- Integration with Mental Health Services: Since many individuals with SUD also experience co-occurring mental health conditions, community-based programs can better coordinate comprehensive care.
- Scalability: Outpatient models are often easier to scale geographically and operationally, a crucial factor for investors and operators seeking growth.
Given these benefits, operators who adapt to this outpatient-focused model position themselves well for the future market landscape in affordable substance use disorder treatment.
Multidisciplinary Consolidation: A Missed Opportunity?
A broader trend in healthcare is the consolidation of multidisciplinary services—combining treatment centers, medication-assisted treatment (MAT) programs, sober living facilities, and counseling services to offer a full continuum of care. However, this multidisciplinary consolidation is less evident in behavioral health, particularly among private equity-backed firms.
Braff points out that PE investors often prefer to specialize in one area rather than horizontally integrate across multiple service types. This preference is largely due to the challenges of managing diverse service lines and geographic constraints.
For example, a PE firm might purchase a treatment center in Washington, D.C., and add MAT and sober living services nearby to create a more comprehensive local care continuum. While this approach enhances patient care, it ties the firm to a single geographic market, potentially limiting expansion.
“But [multidisciplinary consolidation] does comport well with people who are long-term holders, people that are not investing with the sole idea that they’re going to divest in five to seven years,” Braff noted. “We see this as a fantastic opportunity for people that are not necessarily looking at a near-term exit plan to develop this multidisciplinary model.”
For investors with longer-term horizons, this approach can create durable, integrated service platforms that meet diverse patient needs and build sustainable community partnerships focused on affordable substance use disorder treatment.
Behavioral Health M&A on the Rise: The Mental Health Surge
Beyond SUD, the broader behavioral health M&A market is experiencing strong growth. In 2021, The Braff Group reported 250 behavioral health deals, compared to fewer than 200 deals in 2019. This upward trajectory highlights the increasing investor appetite for behavioral health services overall.
Within the behavioral health sector, mental health is the fastest-growing subsector for M&A activity. In 2021, roughly 80 mental health transactions occurred—up from fewer than 60 in the prior year. This surge is attributed largely to the fact that mental health services had remained relatively unconsolidated until recently, coupled with increased demand driven by the COVID-19 pandemic.
Several major deals illustrate this momentum, including:
- KKR’s acquisition of Therapy Brands
- Patient Square Capital’s purchase of Summit BCH
- Onex Partners’ majority acquisition of Newport
Dexter Braff explained the drivers behind this growth: “Mental health has taken off. It’s largely a function of the fact that it hadn’t been consolidated yet, and the idea that therapy now is a crucial need as a result of COVID.”
As mental health and substance use services often intersect, increased consolidation and investment in mental health could further accelerate growth and integration in SUD treatment, particularly within the sphere of affordable substance use disorder treatment.
What This Means for Behavioral Health Operators and Investors
The evolving market landscape has clear implications for behavioral health providers and investors:
- Focus on Affordable, Accessible Care: Operators should prioritize state-funded and affordable programs that serve the majority of patients.
- Expand Outpatient and Community-Based Services: Developing and scaling outpatient addiction care services will be key to meeting demand and capturing market share.
- Consider Multidisciplinary, Integrated Models: For long-term investors, building integrated service platforms that combine SUD treatment, MAT, sober living, and mental health counseling can create sustainable growth.
- Monitor Mental Health Consolidation Trends: The rapid rise of mental health M&A may open new partnership and expansion opportunities within the SUD space.
- Adapt to Market Realities: Luxury programs, while appealing, represent a smaller and less sustainable segment compared to affordable care.
In summary, the future of SUD treatment lies in affordable substance use disorder treatment programs that are community-focused and integrated with behavioral health services. Operators and investors who recognize and adapt to this reality are better positioned to thrive in the changing behavioral health market.
Understanding these trends can help stakeholders make informed decisions that align with where the market is headed, ensuring that high-quality, affordable substance use disorder treatment remains accessible to those who need it most.
