Discovery Behavioral Health Trims Residential Care To Shift Business Strategy

Discovery Behavioral Health has consolidated or closed around 14 to 16 locations as part of a retooling of the company in the face of severe market pressures.

The provider plans to deemphasize its focus on legacy residential care and double down on its “consumer-direct approach,” Discovery Behavioral Health CEO John Peloquin told Behavioral Health Business. Specifically, the Irvine, California-based diversified behavioral health company emphasizes outpatient services, telehealth, outcomes tracking, and larger, more cost-efficient locations; it is also moving away from the so-called “six-bed” residential care delivery model.

“There is an imbalance between the cost-drivers — labor, cost of doing business with the national inflation rates — and reimbursement from payers,” Peloquin said. “That requires [Discovery Behavioral Health] to become more efficient. That’s the driving force. Payers aren’t going to supplement you for inflationary aspects and high interest rates.”


Other challenges bedeviling organizations like Discovery Behavioral Health include cemented payer rates, shifts in consumer care setting preferences and labor challenges.

Discovery Behavioral Health’s revenue is largely generated through working with commercial health insurance plans. Another partial impetus for the changes was feedback from payer partners, Peloquin said. Commercial health plans have often hesitated to raise reimbursement rates beyond traditional single-digit percentages that shadow previous levels of inflation, if at all.

The company initiated the pivot about three months ago. Since then, the company’s census has increased, and its balance sheet can better cope with the economic headaches that other organizations like Discovery Behavioral Health face. 


It has also stopped virtual partial hospitalization programs (PHP) for adolescent patients, making the clinical determination to only offer up to intensive outpatient programs (IOP) virtually, based on the clinical belief it’s better to offer PHP services in person.

The company is closing sites in markets where it doesn’t have a strong presence and investing in markets where it does. For example, Discovery Behavioral Health added eight locations through its Center for Discovery, its eating disorder treatment brand, and Discovery Mood & Anxiety Program, one of its mental health brands, in 2023, according to a review of the company’s website.

While he declined to discuss specific numbers of locations impacted by consolidation or closure, citing ongoing negotiations with regulators and landlords, Peloquin said Discovery will repurpose some of the locations for other service types. Between closures and consolidating locations, between 14 and 16 locations have been impacted. He also said the total number of affected sites totaled around 10% of its national footprint, about 150 when the process started.

“Yes, like other companies, we find ourselves challenged by skyrocketing interest rates,” Peloquin said. “Needless to say, we are focused on strengthening our balance sheet and divesting several smaller programs in areas we do not have sufficient market penetration.”

The increased telehealth and outpatient services will manifest through DiscoveryMD, the outpatient mental health services brand it announced in February 2022. Specifically, it’s zeroing in on treatment-resistant depression.

The company revealed its outcome-tracking and measurement-based care initiative in September. It announced a deal with the AI-backed video analysis and recovery tracking startup Videra Health and Brigham and Women’s Hospital to create Discovery365. Discovery365 tracks and supports patients in treatment and for up to a year after to lessen the risk of relapse.

Discovery Behavioral Health shifts focus

Discovery Behavioral Health was established with emphasis on treatment in comfortable settings. Some of the original Discovery Mood & Anxiety Program locations, founded in 1997, provided residential treatment to children in large homes.

Center for Discovery and the Discovery Mood & Anxiety Program use the self-descriptive six-bed model, often in large, luxurious homes. Overall, Discovery markets its residential facilities as “beautiful, homelike environments.”

The “dominating motivation” for the pivot is getting away from the six-bed model, Peloquin said.

Discovery Mood & Anxiety Program locations in Granite Bay, California, and Fairfield, Connecticut, are multi-million-dollar homes with five bedrooms and five bathrooms in each. These types of facilities, especially in markets where Discovery doesn’t have a large presence, are inefficient. 

The economics of these small locations, as Peloquin said, require that they remain nearly full. At a six-bed facility, Discovery needs to maintain an average annual census of about 5.5 patients. If a facility’s census slips to 4.5, for example, the operating costs remain the same This makes operating these facilities precarious, especially when other business pressures are applied. Altogether, these factors can put these facilities “in an upside down place,” requiring consolidation to avoid losses. 

Discovery Behavioral Health is not alone in its attempts at greater efficiency. BHB reported in December that Discovery Behavioral Health and Odyssey Behavioral Health were closing eating disorder treatment facilities. The Discovery residential treatment facility it closed in Dunwoody, Georgia was a 6-bed-room, 7-bathroom, 6,700-square-foot home.

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