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Will dealmaking pick up in 2025? I posit: yes!
We’re off to a good start in 2025. Behavioral Health Business’ tracking of the industry has logged about 50 deal announcements — including M&A and investments — that are behavioral health-focused or industry-adjacent. Granted, some of these announcements are far enough on the edges of our coverage that we haven’t written about them.
This is helping with the vibes of the industry. I’ve written before that so much of the dealmaking universe is centered on vibes, especially vibes induced by economic data or other developments. A few months ago, the prospect of rate cuts by America’s central bank, the Federal Reserve, helped lift the mood toward the end of the year.
Up until 2023, both the investment and M&A sides of dealmaking experienced unprecedented highs. After a record-breaking run, everything gets measured in relation to that streak. And 2023 was quite the falloff from many perspectives. Understanding that perspective, perhaps something of a bias that thinking in numbers creates, overshadows the still historic nature of the present moment behavioral health is in right now.
Plus, 2024 looks remarkably similar to 2023 in terms of deal volume. That’s notable given the growing pressure behind dealmaking in the space. That pressure comes from some very powerful places that many are familiar with: a growing heap of dry powder at private equity firms, the natural life cycle of for-profit enterprises and the overwhelming gravity of the fundamentals of the behavioral health industry.
Eventually, that pressure is going to have to give.
In the latest edition of your exclusive BHB+ Update, I’ll look at three topics:
— Why bother looking at dealmaking at all
— How dealmaking helps behavioral health fit better within health care
— Serious issues that could limit dealmaking
Why focus on dealmaking?
I see dealmaking as a vital sign for the industry. Others do as well. Like behavioral health care generally, I feel like I’m grasping for the “right” metrics to assess the progress of the industry. Dealmaking data is obvious: it goes up, it’s down. It can also be compared with other data or be used to extract key qualitative insights.
I would also posit that when deal volume generally is up, that means that some force is at play, and usually that is a good thing. What we ought to hope for is steady, continuous years of increased deal numbers or cyclical up-and-down years that average out to overall increases.
All the new money, interest, and patient demand has put more provider organizations in the field. With the incumbents, similar or complementary organizations will realize they can do more together.
The arrival of new and similar organizations, in most instances, introduces market inefficiency. Markets’ tendency to move toward efficiency necessarily means that things are going the way that they should when companies are merging.
Here’s another way to think about this. Each deal also represents some part of a behavioral health business equivalent of the food chain, which is itself the description of the transfer of energy within nature. The new capital and overall energy in behavioral health acts as the very beginning of the cycle, like algae or plankton. That energy is passed through the system in several ways. The one we learned about in school looks something like a little fish being eaten by a bigger fish and so on.
But sometimes, systems get out of whack and take time to settle. We saw something like that in 2023, and it continued to some degree in 2024. And we might be getting back to that more settled state.
BHB is seeing several smaller investment rounds and M&A among smaller firms. A specific example of that latter: Fullerton, California-based Autism Spectrum Interventions acquired San Fernando, California-based Quality Behavior Solutions and now operates as Alongside ABA. This could represent a recharging of the potential acquisition pool for some of the larger, potentially terminal acquirers in the space.
M&A helps behavioral health fit in
Behavioral health’s increased relevance has highlighted the need to address fragmentation within the industry and across the physical health care divide. An effective way to do this is through thoughtful M&A.
Sure, neither entity in a cross-specialty merger knows how to do things that the other does. But such a merger, if well conceived, serves the needs of the most important stakeholders in the industry: the patients. Humans are diverse and varied. So are their behavioral health care needs. That the industry has progressed this far largely siloed and isolated from the rest of the health care industry — to say nothing about the siloed nature of behavioral health specialties — is remarkable. Continued advancement of the industry requires new, different and perhaps unusual matches.
To not minimize the challenge, there are several huge barriers that have kept this from becoming an industry norm.
Integration of the behavioral health industry with the rest of the health care industry is another compelling option.
This is widely at play within digital health. The recent big-dollar Accolade-Transcarent tie-up addresses concerns that “healthcare today is too confusing, too complex and too costly.” All-in-one digital partners that provide a suite of medical services, including behavioral health, on top of tech and support services meant to make it all a little easier is a very compelling B2B offer.
On top of strategic plays that operators may or may not do, there is a natural gravity that has to follow when something reaches a peak. I’m not so sure that we have seen all of the deals that simply come after a certain amount of time. We are about four years out from the peaks of 2021, with 2026 being the classic end of the five-year period.
What gets in the way?
In short, the Trump administration is the biggest unknown and potential source of harm to dealmaking, at least the kinds of deals that we hope to see.
I say that this is a big unknown even though I know there is, at least by all appearances, a genuine desire to cut back on the public health plans Medicare and Medicaid. Earlier this week, the U.S. House of Representatives passed a framework that requires $880 billion in funding cuts to federal activities overseen by the House Committee on Energy and Commerce. Of all the activities that this committee oversees, nearly all of the dollars involved are in the Medicare and Medicaid programs.
The GOP-led effort to cut public federal health care benefits has advanced despite President Donald Trump saying at times that budget cuts would not impact the programs.
Should the cuts pass at their utmost, the outcome will require states to fundamentally question how they finance their end of the Medicaid program. If possible, if not somewhat unlikely, the better share of states pick up the funding slack. But that is a big ‘if’ to pin hopes on. Rather it is more likely and therefore more prudent to start considering strategies that can deal with reality where Medicaid and Medicare by less for behavioral health.
With so much of the addiction treatment and autism therapy industries caring for people in the Medicaid program, the impact of the cuts could be profound. At the most dire, providers can’t afford to care for these patients. The downstream of that is that behavioral health providers have simply left some percent of their revenue on the table at no fault of their own.
It will take time to assess the impact of these cuts. That time could be in the realm of a year or more to see if some other aspect of the market or a new strategy will reasonably fill the void. That will keep already skeptical dealmakers out of the game.
And once the new normal is established, it’s likely that the financial viability of investing in a space where Medicaid is overrepresented relative to the population of a community will diminish. And that, too, will drag down dealmaking.
That will show that things have gone wrong. Unlike the run-up to the funding and M&A peaks that were done privately in office and board rooms until publicly disclosed, this is coming to us in real-time. That means that things could change. But it’s not clear how.
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