The outpatient substance use disorder (SUD) industry has evolved from a landscape of mom-and-pop businesses to a field dominated by sophisticated providers seeking to provide quality care.
While the SUD industry has matured over the last decade, it still faces significant roadblocks like stigma surrounding medication-assisted treatment (MAT) and fragmentation. The splintered SUD market offers an attractive opportunity for consolidation, industry insiders said at Behavioral Health Business’s INVEST event, but investors and operators must grapple with valuations.
When Diane Daych, managing partner and co-founder of private equity firm Granite Growth Health Partners, began investing in the outpatient SUD industry, many providers lacked the sophistication now seen as standard.
“It was very much a mom-and-pop type business when you think about outpatient treatment with Suboxone,” Daych said at INVEST. “There were a few organizations of scale, but mostly these mom-and-pop pill mills with pretty negative reputations. They weren’t focused on quality care and best practices and were almost all cash pay.”
Granite Growth Health Partners makes $10 to $50 million investments in emerging growth health services companies. The company’s portfolio includes Acute Behavioral Health and CleanSlate Outpatient Addiction Medicine.
Outpatient SUD providers have now evolved to what Steve Priest, CEO of Spero Health, calls its “toddler phase” and is moving towards adolescence.
Nashville, Tennessee-based Spero has more than 95 outpatient locations throughout Kentucky, Ohio, Indiana, Virginia, Tennessee and West Virginia. The company combines physical and behavioral health care services to offer patients an integrated, community-based treatment model.
Priest said that eliminating the 275 waiver increased the number of dedicated, full-time SUD clinicians, improving the quality of care. Technology, including electronic health records (EHRs) and telehealth, has also contributed to the maturation of the industry.
Advancements in technology and providers have led to improved patient outcomes, Corbin Petro, founder, board member and advisor of Eleanor Health, said.
“For so long in this space, we weren’t really tracking outcomes, or outcomes could be easily manipulated,” Petro said. “A huge portion of the outcomes in this space are patient-reported. But there are psychometrically-validated scales that have tons and tons of data to benchmark against, PHQ-9, recovery capital, the GAD-7. Starting to use those outcomes and measurement-based care is in the earliest part, in this space versus other parts of healthcare, but it’s starting to emerge.”
Waltham, Massachusett-based Eleanor offers outpatient and virtual services, including therapy, psychiatry, medication for addiction treatment (MAT) and peer support. The company announced a partnership with Spring Health in Oct. 2023.
As the industry evolves, providers will work together to improve regulations, Priest predicted.
“There’s some excitement in my mind, because we are able to lift everybody up together,” Priest said about outpatient SUD providers. “You’re seeing that as it relates to things we do with government relations and other opportunities to work together. The strong providers help pull the entire industry up, and that is going to continue.”
Future progress in the space will involve consolidating what are currently very fragmented providers, Daych said.
“There are a handful of organizations that are institutionally backed that are really scaling but there is still huge room for more scale, both through consolidation and a lot of white space,” Daych said. ”The general healthcare market, and SUD specifically, is moving towards making sure we have the right insurance coverages and focusing on best practices.”
Despite the SUD space’s maturation, providers have also witnessed shrinkage in M&A.
While the behavioral health industry remains an attractive option for investors, buyers were skittish in 2023 and fewer deals reached the finish line. Investors’ wariness is not matched by behavioral health owners and operators.
“Despite the dislocation in the broader market, maybe the higher-end private equity transactions and strategic transactions, we find a lot of the founder-owner-operators really haven’t adjusted their expectations of value,” Daych said. “There’s still a bit of a disconnect there. We’re seeing a lot of behavioral health deals, but not necessarily ones that we want to pursue or that we can pursue with the right value.”