Outpatient youth behavioral health services will likely continue to attract interest from venture capital, especially services that are enabled by telehealth and AI. 

That was one takeaway from a panel regarding the future of youth behavioral health models, which was part of Behavioral Health Business’s INVEST conference held in Dallas.

Jose Guerola, a principal at Echo Health Ventures, said outpatient services “is where the puck is going” when it comes to investment Echo and other venture firms give to youth-focused behavioral health companies. Meanwhile, residential treatment “is just not a focus for us right now,” Guerola said. 

The heightened interest in outpatient settings enabled by telehealth and the waning interest in residential services are driven by several potent trends.

On one hand, telehealth is seen as a way to overcome care access challenges. Investors have thus piled into this segment. Guerola noted that Echo, which is based in Durham, North Carolina, has made equity offerings to companies such as Eleanor Health, which provides “addiction treatment from the comfort of home.”

On the other hand, the residential treatment space is losing its relevance. Many are pushing to ensure children get care earlier on and in less intensive settings. Also, the industry faces increased scrutiny by policymakers, including Sen. Ron Wyden, chair of the U.S. Senate Finance Committee, over alleged wrongdoing by some of the space’s largest operators. Wyden has been pushing for more intensive investigations of the space.

The shift also reflects sensitivity to those who cannot physically access their treatment location, said panelist Hafeezah Muhammad, CEO of Backpack Health.

A former vice-president at mental health provider Thriveworks, Muhammad founded Elkridge, Maryland-headquartered Backpack in 2020. The company, Muhammad said, is an outgrowth of seeking mental health care for her son, who, because of a disability, is enrolled in Medicaid.

Backpack partners with commercial insurers to provide in-network care. But its model focuses on helping children who are on Medicaid, Muhammad said.

“With kids on Medicaid, you’re seeing that their needs are becoming more acute because they are going a long time without getting care,” Muhammad said.

In serving this patient population, Backpack Health has taken steps like hiring people fluent in multiple languages.

“The kids speak English a lot of the time, but the parent’s don’t,” she said.

In May, Backpack announced a $14 million Series A funding round led by Pace Healthcare Capital. According to Muhammad, Backpack is using the money to expand from Maryland and Virginia to surrounding states and also to “meet some of the regulatory requirements from a tech perspective.”

Besides services like virtual therapy and medication management, Backpack created an app that uses AI to monitor a client’s emotions and match them with an appropriate therapist.

Guerola said that Echo, which is not an investor in Backpack, has interest in companies that develop ways to keep in touch with patients and detect issues like co-occurring conditions.

“It doesn’t really have to be AI — just any technology that helps effectively measure the type of patient care,” Guerola said. 

The panel also spoke on who the “youth” in youth behavioral health care are exactly. 

Muhammad said that Backpack is accepting patients from ages four to 26. She noted people can remain on their parent’s health plan until age 26 under the Affordable Care Act.

As for the early part of the age range, Muhammad said that Backpack first considered a focus on adolescents but then discovered the majority of mental health illnesses start by age 14.

“We needed to start early interventions,” Muhammad said.