After years of stagnation, behavioral health providers are actively seeking growth opportunities and finally warming up to more M&A.

The uptick in deal flow is evident in even the first month of the year. Behavioral health platform company Oceans Healthcare announced the purchase of Haven Behavioral Healthcare in early January, and Iris Telehealth closed a deal to acquire InnovaTel from Quartet at the end of the month. It’s not just M&A picking up; it’s also behavioral health investments. Eleos, DarioHealth, SlingshotAI, and Prosper Health have closed funding rounds during the first month of the year.

However, industry insiders say these examples are likely just the tip of the iceberg in deals we can expect in 2025.

“I have been involved in M&A in our industry for almost four years now, and just the activity and the interest level on promoting buyers and sellers feels different now than it has at any point over the last three to four years. We’re starting to see that activity pick up,” Dan Ferris, chief growth officer at LifeStance, said during a Behavioral Health Business webinar.

“From a LifeStance perspective, we were very public about taking a break from M&A in ’23 and ’24. We are ready to get back into M&A … I think the industry seems ready, and I think there’s a broad awareness that consolidation is likely better for all parties. It’s better for patients, it’s better for clinicians, and it’s better for just the business community to have healthy, sustainable businesses.”

LifeStance (Nasdaq: LFST) is one of the nation’s largest outpatient behavioral health providers. It operates in 33 states and has more than 500 centers.

While the behavioral health industry is no longer made up of only mom-and-pop providers, there is still a lot of room for consolidation. That move towards consolidation could help stakeholders, such as payer organizations, sort out the quality providers.

“It’s a busy marketplace. I think from a payer perspective, it’s still very hard to navigate, in terms of the high-quality providers who are going to stick around,” Jenny Welling-Palmer, chief strategy officer at Thriveworks, said on the webinar. “There’s been a lot of market entrance over the last couple of years as well. So I think consolidation can be a good thing in terms of being clear on who’s driving quality and outcomes.”

Thriveworks is a large outpatient behavioral health provider. It operates 350 centers in 49 states.

At the end of 2024, Thriveworks jumped into the M&A arena by acquiring AI-powered behavioral health company Synchronous Health.

Hurdles in dealmaking 

While it’s safe to say there will likely be more M&A and funding pouring into the space in 2025, there are still some potential challenges. For starters, a new administration took over earlier this month, which means a new regulatory agenda and priorities.

“There’s uncertainty around telehealth rules; there’s uncertainty around exactly what funding is going to look like,” Andy Cruz, chief medical officer at Guidelight, said on the webinar. “I think initially, in these first couple of months, while all that gets sorted out, and we get some more concrete direction, there may be some hesitancy. Then, I expect things to pick up after those rules are more solidified or we have a little more direction. I am hearing just a lot of whispers and uncertainty.”

Guidelight offers intensive outpatient programs (IOPs) and partial hospitalization programs (PHPs). Its programs consist of individual therapy, group therapy, and medication management. The company has roughly $16.35 million in funding. It has backing from GV and Triple Aim.

But that’s not the only challenge for dealmaking. There’s a lot of competition in the digital behavioral health space in particular.

“Mental health has been the top funded clinical indication since 2020, which means that there are a lot of solutions out there from young companies, which are going to have to differentiate,” Laura Gomez Cadena said during the webinar. “Between 2020 and 2022, there was a huge emphasis on general access to behavioral health, and that encompassed mostly addressing mild cases of anxiety and depression; I think we’re at a point now where employers and payers not only have found initial partners in this area. These new companies are going to have to have. Rather, the preliminary data backing why you’re different to some of the partners that they have in place, or even taking advantage of the sub-segments that we have in behavioral health, for example [serious mental illness].”

Healthworx is the innovation and investment arm of CareFirst BlueCross BlueShield. Its portfolio includes behavioral health companies Prospera, Shimmer and April Health.

Will outpatient therapy remain an investor darling?

Despite the slow dealmaking environment over the last two years, the outpatient mental health segment saw a lot of love. This included deals like Optum-owned Refresh Mental Health’s acquisition of outpatient mental health provider CARE Counseling.

But will the interest in this segment continue? Industry insiders say yes.

“A third of Americans still live in a shortage area of mental health professionals and a third of the population in this country still can’t access care,” Welling-Palmer said. “There are people out there who still need to receive care. So I think from a provider group perspective, and also from a payer perspective, we have not even gotten close to tapping out this market and saturating the market; I think this will only continue.”

It’s not just traditional outpatient services that are growing but also intermediate levels of care, such as IOPs and PHPs, that offer an alternative to costly inpatient stays.

“Intermediate levels of care, situated between the two most utilized levels of care, is perfect to resolve inadequacies in [inpatient care]. Inpatient care is really expensive containment and not so much care,” Cruz said. “Not only is there an academic movement away from inpatient as being effective, there’s also a Zeitgeist movement away from inpatient.”

Despite the strong investor interest and growing demand for outpatient services, some outpatient providers are finding growth limitations. This is why quality of services must come before just accessibility.

“There is unquestionably a lot of growth still to come within outpatient mental health; at the same point, I think what’s interesting is probably 90% of the scaling companies I talk to talk about demand actually being a constraint to their growth,” Ferris said. “There’s this dichotomy that you wouldn’t necessarily expect where we have a dearth of mental health access, patients are underserved… and there are companies in our space that are having trouble finding patients. I think part of the reason for that is … it’s not enough just to offer access. It’s offering high-quality care for the patient journeys and the payers needing help.”