This is an exclusive BHB+ story

Dealmaking in the addiction treatment space remains in a sustained lull, suggesting a deeper recalibration on the part of investors and operators in the space.

The addiction treatment segment is the prime and early example of investment in the behavioral health industry. But the overall appetite for dealmaking and investing in addiction treatment has changed and perhaps lessened, as perennial headwinds and new ones combine to push the industry in a new direction.

That’s not to say that all interest in the addiction treatment space has dried up. Data from multiple sources indicate that deals are still being completed in space and have slightly picked up in recent months.

“This slowdown will probably be a temporary correction and not one of gradual decline in the industry,” Michael Villarreal, CEO of San Juan Capistrano, California-based Tres Vistas Recovery, told Behavioral Health Business. “The need for treatment keeps growing, and strategically placed providers will finally become popular again when money problems are fixed.”

Tres Vistas Recovery operates a center in San Juan Capistrano that can treat up to 30 people. Its all-in-one location includes partial hospitalization programing (PHP), intensive outpatient programming (IOP), medication-assisted treatment (MAT) and dual diagnosis care for addictions and mental health conditions.

Today, the industry is coping with major setbacks to its financial success and the full realization that previous business models or investment theses no longer hold true due to new and evolving trends. While extant before 2020, the onset and fallout of the COVID-19 pandemic touched off many of these challenges or intensified them.

Inflation generally demanded that addiction treatment providers pay more for the same labor pool or cut back to sustain current levels of profitability. The resultant hikes in interest rates made debt much pricier and, therefore, less viable, especially for dealmaking. At the same time, ballooning interest rates heaped giant increases on required debt payments for the many providers that hold variable debt, a common tool in private equity-backed leveraged buyouts. These factors degrade the profitability and adjusted earnings that are central to the terms of the deals.

The overall candidate pool for organizations that provide addiction treatment has been depleted heading into the lull. Historic levels of investment and dealmaking in the space saw record-setting dealmaking numbers. The financial weakening of the sector further winnowed down the pool of viable platform investment and acquisition targets for tuck-in deals. With a smaller pool, there are fewer providers with the financial resources or scale to attract much attention. 

What the data show

From a historical perspective, addiction treatment dealmaking is clearly down. But different views of the data suggest continued decline or an increase, depending on how you slice it, when assessing 2024.

Data provided by The Braff Group shows that the addiction treatment space slipped about 11% in 2024. However, data from Mertz Taggart shows a 24% increase. Categorizing the behavioral health industry, especially the mental health and addiction treatment industries, has become increasingly difficult, given the industry’s continued adoption of care models that address the interplay between conditions of both types.

Regardless of differences in assessment of last year, both M&A firms’ data show a steep drop-off from the peak of dealmaking in 2021: down 54%, according to Mertz Taggart, and 52%, according to the Braff Group.

These data reflect a shift in dealmaking trends with the subsectors of addiction treatment, some of which are familiar. Overall, interest in out-of-network offerings, regardless of care type, and residential or inpatient care settings, regardless of network status, are simply less popular places for investment. 

“This overall decline is due, in part, to increased interest in lower-cost non-residential community-based programs, which saw a 32% increase in deal flow for the three-year period ended 2024 vs. 2021,” Dexter Braff, founder and president of The Braff Group, told BHB.

This aligns with a shift in payer interest regarding care settings. For years, payers have deprioritized in-facility care types by lowering reimbursement rates, driving providers to offer less intensive outpatient care settings.

Still, dealmaking is down in the outpatient addiction treatment space as well. Braff said there has been a 57% drop in deals for medication-assisted treatment (MAT) providers from the two-year period ending in 2022 compared to a similar period ending in 2024.

“This is due to a combination of the exit of Baymark, one of the most active consolidators in the space, from the acquisition market, the lack of sizable candidates available for acquisition, and the emergence of home-based, technology-enabled providers,” Braff said.

BayMark Health Services is a titan of addiction treatment. It’s the largest provider of care generally and is the largest provider of MAT services in North America. It operates 297 locations in the U.S. and Canada, with most being opioid treatment programs (OTPs).

The company was acquired in 2015 by Webster Equity Partners. In 2021 and 2022, it went on a bit of a buying spree, announcing 18 deals over those years. In previous reporting, dealmaking experts pointed to BayMark as a company to watch for a potential trade.

Jonathan Bluth, managing director of the health care and life sciences team of the M&A firm Brown Gibbons Lang & Company, also noted that other large private equity-backed companies have backed off of acquisitions.

“The backdrop is important, as several of the largest acquirers of substance use disorder treatment centers have been under operational duress and are not in a position to make acquisitions, so the likely buyers for SUD businesses today are equity groups looking for new investments,” Bluth told BHB.

Echoes and reckonings

Several sources contacted for this story pointed to the difficulty that addiction treatment providers face when it comes to operating in a high-inflation, higher-than-normal wage and compressed payer reimbursement landscape.

In the years leading up to COVID, many of the operational challenges were significantly smaller than they are today. This, in part, made the addiction treatment space much more attractive from an investment standpoint, and the lessons learned since then show how previous suppositions about a market can shift, sometimes dramatically.

“A few years ago, the space was flooded with investment interest. There was a belief that you could scale addiction treatment like a tech startup—open multiple locations fast, push aggressive growth, and rely on insurance reimbursements to keep the engine running,” Andy Danec, owner of Columbus, Ohio-based Ridgeline Recovery LLC, told BHB. “But the reality is this industry doesn’t scale cleanly. It’s deeply personal, highly regulated, and full of operational nuance that doesn’t fit neatly into a spreadsheet.”

The scale of the largest addiction treatment providers demonstrates the difficulty of scaling a national platform. Apart from BayMark Health Services, there are no other true nationwide addiction treatment platforms. There are several that have high density in specific regions of the U.S.

Kevin Taggart, co-founder and managing director of Mertz Taggart, told BHB that the end of a “gold rush” for veteran-specific addiction treatment services in recent years further throws cold water on dealmaking in the space. Until last year, the U.S. Department of Veterans Affairs didn’t set a fixed fee for some addiction treatment services. Rather, it would reimburse services at the seventy-fifth percentile of charges by several providers for the same service. 

“Payments could be $3,000 a day, in some cases, down to, depending on where you are, $1,000 or $1,500 a day,” Taggart said. “I think that hurt a lot of players as well.”

That has slowed interest in these services significantly, Taggart said, adding that relative patient demand has not stopped.

He also noted that there has not been a dramatic reduction across the board among payers at the national level, noting that in recent years, the rates for addiction treatment have been depressed.

While not referring to any company specifically, he noted that stumbles by big-time public failures by private equity-backed companies can give dealmakers pause.

Delphi Behavioral Health Group filed for bankruptcy in 2023 after starting as an out-of-network addiction treatment provider. After a couple of rounds of private equity investment and debt financing, the company filed for bankruptcy and was sold for parts, some of which were acquired by Harmony Health Group.

Since 2019, Blended Health has pivoted so many times and bought and sold so many assets that it eventually evolved into a completely new organization that no longer focuses on addiction treatment. Originally founded as Addiction Campuses in 2014, the company was acquired by Summit Partners in 2018 at which time it provided destination residential treatment. The company publicized its conversion to Blended Health in 2024.

Mixed projections for the future

Continuations of the shift toward outpatient care highlight the opportunity for addiction treatment providers. However, palpable uncertainty around the future of Medicaid may continue to complicate the calculus for investing in addiction treatment.

Over the years, partial hospitalization programs (PHPs) and intensive outpatient programs (IOPs) have emerged as a bright spot in the slowdown of dealmaking and investment in recent years. The model, which allows for significant time spent in treatment without the overhead of facility-based care, appears to create a middle ground for all stakeholders in behavioral health.

“They offer scalability with lower overhead and satisfy investor appetites currently,” Villarreal said. “The climate is one that favors programs with measurable outcomes and financially viable staffing models.”

Still, these models come with challenges that more and more providers and investors are willing to face, not the least of which is an “all-or-nothing” payment structure for many such programs.

Regardless of the promise, the looming reforms to Medicaid, which don’t appear to cut reimbursement per se but create more barriers to coverage, have many in the space waiting to see which way the issue will break.

“Addiction treatment transactions have been mired in a tough M&A market, but they will rebound with strong activity once the Medicaid reform uncertainty is clarified,” Bluth said.

Bluth added that he sees the Trump administration ultimately favoring increased treatment and said the industry should expect some degree of insulation from reform. He points to a pending congressional spending bill containing provisions to define those with substance use disorders as medically frail and, therefore exempt, from proposed work requirements.

“How this gets implemented will be important, but once more of the details emerge, we should see the doors open for more M&A activity in this sector,” Bluth said.

Others still point to the widely fragmented nature of addiction treatment, continued demand for service, and consistent, if diminished, interest in the space by investors as a reason for expecting an eventual rebound.

“In short, the slowdown isn’t just market fatigue — it’s a course correction. The money’s still there, but now it’s looking for sustainable operators who actually understand the human side of recovery, not just the business model,” Danec said.