Behavioral health has a reputation among investors for strong margins and steady demand, but the reality on the ground is more nuanced than “healthcare but with better returns.” A well-run Intensive Outpatient Program (IOP) or Partial Hospitalization Program (PHP) can absolutely be a compelling business, but only if you understand why those margins exist, what can erode them, and how to manage the regulatory and reimbursement landmines along the way.
This guide is for investors, financial professionals, and clinicians who are starting to think about the business side of behavioral health. If you’re evaluating whether to put capital into an IOP or PHP program, or you’re a clinician exploring whether outside investment makes sense for your practice, here’s what you actually need to know.
Why Behavioral Health Investment Has Exploded
The macro tailwinds are real. In recent national survey data, roughly 1 in 5 U.S. adults report experiencing any mental illness in a given year, representing more than 60 million people, and a smaller but still significant share experience serious mental illness. At the same time, millions of people who meet criteria for a mental health or substance use disorder do not receive care in a given year, creating a persistent “treatment gap” that has become a core focus of federal agencies like SAMHSA and NIMH. The pandemic didn’t create these trends, but it did accelerate demand, normalize help-seeking, and push payers to expand coverage for telebehavioral health and higher levels of care.[ppl-ai-file-upload.s3.amazonaws][nimh.nih]
Private equity and other institutional investors noticed. Multiple industry reports over the last several years have documented record behavioral health M&A activity, with private equity sponsors leading a large share of mental health and addiction treatment deals as behavioral health became a priority subsector within healthcare services. Much of that capital has chased residential treatment, addiction treatment, and large outpatient psychiatry/therapy platforms. In contrast, IOPs and PHPs — those middle levels of care between inpatient hospitalization and weekly therapy — remain comparatively fragmented, with many small, clinician-led programs and fewer scaled platforms.[samhsa]
That fragmentation is the opportunity. It means there are still markets where a well-designed, well-operated IOP/PHP program can become the go-to option for step-down care from hospitals and step-up care from community psychiatrists and therapists.
Understanding the IOP/PHP Business Model
Before you put a dollar in, you need to understand what you’re actually buying.
PHP (Partial Hospitalization Program). A PHP is a structured, intensive program that typically delivers at least 20 hours per week of daytime therapeutic services, without overnight stays, and is positioned as an alternative or step-down from inpatient psychiatric hospitalization. Commercial payer reimbursement for PHP can vary widely by state and plan, but published analyses of private facility pricing suggest daily rates in the mid-hundreds of dollars are common, and it is not unusual for private-pay rates to reach several hundred dollars per day at some facilities. Clinically, patients often step down from PHP to IOP after a few weeks once symptoms stabilize.nami+1
IOP (Intensive Outpatient Program). An IOP usually provides about 3 hours of group and individual services per day, several days per week, and is designed for people who need more support than weekly therapy but do not meet criteria for inpatient or PHP care. Commercial reimbursement per encounter is lower than PHP on a per-day basis, but IOPs can run more groups per week, serve more patients concurrently, and operate with somewhat lower staffing intensity, which changes the margin profile.[nami]
A mid-sized program running a mix of PHP and IOP census can reach seven-figure annual net collections once payer contracts, referral streams, and revenue cycle are in place. The exact numbers depend heavily on payer mix, local fee schedules, and clinical model, so any specific revenue estimate should be treated as a scenario rather than a guarantee. The key word in any projection is “net”: what you actually collect after denials and write-offs is often very different from what you bill.
The Revenue Cycle Problem Most Investors Miss
This is where behavioral health investment gets complicated.
Reimbursement in behavioral health runs primarily through insurance payers — commercial plans, Medicaid, and Medicare. Each has its own coverage policies, prior authorization rules, documentation standards, and audit risk. For example, Medicare covers PHP services under Part B when certain clinical criteria are met, but requires that programs meet specific conditions of participation, bill using appropriate codes, and adhere to documentation and physician oversight requirements spelled out in CMS guidance. Commercial payers often layer on additional medical necessity criteria and utilization review processes.naco+1
For new programs, denial rates on initial claims can be high when credentialing is incomplete, documentation is inconsistent, or billing workflows are immature. Even small, repeated issues — missing signatures, ambiguous diagnoses, inconsistent treatment plans — can delay or reduce payment. It is not unusual for young programs to discover that a seemingly healthy top-line billings number translates into a much smaller collected number in year one or two.
Sophisticated behavioral health investors therefore spend as much time on the revenue cycle as they do on the pro forma. They look at:
Days in accounts receivable (AR)
Denial and appeal rates
Payer mix (commercial vs Medicaid vs Medicare)
The maturity of the billing and coding process
A program with a high percentage of commercial payers, clean documentation, and AR consistently under 60 days is fundamentally different from a program heavily weighted to low-paying Medicaid plans with messy billing practices. The former has a better chance of supporting the margin stories investors like to tell; the latter may struggle to cover fixed costs even with full groups.
What Returns Actually Look Like
From an investor’s perspective, behavioral health sits in an interesting risk/return band: more operationally complex than a simple office-based practice, but with higher revenue potential per patient and diversified payer exposure.
Early-stage programs (years 1–2) are high-risk, high-reward. They are burning cash on leasehold improvements, licensing, staffing, and marketing while building census. Insurance credentialing and contract execution often take several months per payer, and delays are common; some payers estimate that credentialing can take 90–180 days or longer, depending on completeness of the application and network conditions. In practice, that means revenue may not ramp meaningfully until month 6–9, and investors need to underwrite a longer runway than a simple spreadsheet might suggest.[mertztaggart]
Stabilized programs (year 3+) with solid volumes, a balanced payer mix, and clean financials trade at EBITDA multiples that have, at times, been higher than many other healthcare service lines. In the peak of the 2021–2022 behavioral health deal cycle, industry M&A reports described mental health and addiction treatment platforms commanding mid- to high-single-digit EBITDA multiples, with some premium assets selling higher. As interest rates rose and the broader healthcare services market cooled, those multiples compressed somewhat, but the sector has remained relatively attractive compared to many other outpatient services because of structural demand and a still-fragmented provider landscape.[samhsa]
The best returns in behavioral health investment often come from building and then exiting — not from passive, hands-off ownership. A program that grows from de novo to several million dollars in EBITDA with strong compliance and quality metrics becomes a target for regional platforms, strategic buyers, and private equity-backed consolidators. Those exits are where multiple expansion can turn a solid operating business into a strong overall return.
Regulatory and Compliance Risk Is Not Optional Reading
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Behavioral health is one of the most regulated corners of outpatient healthcare, and the rules change by state.
Every state licenses behavioral health programs differently, often with separate statutes or regulations for mental health, substance use disorder, and child/adolescent services. Some states have detailed licensure categories for outpatient, IOP, and PHP programs, along with physical plant, staffing, and documentation requirements; others regulate these programs under broader facility or clinic categories. On top of state licensure, programs that want to bill Medicare for PHP services must also meet CMS conditions of participation, which mandate specific staffing patterns, physician oversight, and utilization review processes.medicalnewstoday+1
Accreditation is another layer. National accreditors like The Joint Commission and CARF have developed specialized standards for behavioral health organizations, including outpatient, IOP, and PHP services. Many commercial insurers now require accreditation from one of these bodies as a condition of contracting, especially for higher-intensity levels of care. Without it, your access to major payer panels may be limited even if you meet basic state licensure requirements.naco+1
Finally, there is fraud, waste, and abuse risk. Behavioral health — particularly addiction treatment and higher levels of care — has been the focus of multiple enforcement actions by the Department of Health and Human Services Office of Inspector General (HHS OIG) and the Department of Justice for schemes involving unnecessary services, kickbacks, and improper billing. If a program is not following utilization review standards, maintaining adequate documentation, or is engaging in questionable marketing or referral practices, the downside is not just a recoupment; it can include civil monetary penalties and even criminal exposure. No investor should deploy capital into a behavioral health program without an independent review of compliance, coding, and referral practices.[mertztaggart]
Deal Structures Worth Understanding
Not all behavioral health investment looks the same. Here are the structures you’re most likely to encounter:
Equity investment in a de novo program. You fund the startup — buildout, licensing, staffing, technology — in exchange for equity in the operating entity (and sometimes a related real estate entity). This is high risk and slower to cash-flow, but if the program achieves scale and a successful exit, the upside is meaningful.
Acquisition of an existing program. You purchase a program with an existing census, payer contracts, and operational history. The risk profile is different: you’re paying a higher multiple on known cash flows, but you’re also inheriting whatever operational or compliance problems the seller had. Diligence on billing practices, clinical documentation, and referral sources is essential.
MSO (Management Services Organization) partnership. Many states have corporate practice of medicine (CPOM) or similar doctrines that restrict non-clinicians from owning clinical practices outright. An MSO model addresses this by creating a non-clinical entity that provides management and administrative services — billing, HR, IT, facilities, marketing, compliance support — to a clinician-owned professional entity. The MSO receives management fees under a services agreement, while the clinical entity remains responsible for medical decision-making and licensure. This structure is common across healthcare, including behavioral health, and has been discussed extensively in healthcare law and policy literature as a compliant way for non-physician capital to participate in practice economics.[nami]
Real estate and operations separation. In some deals, one entity owns the real estate and leases it to the operating company. This allows investors with different risk appetites — or different pools of capital — to participate separately in the real estate and the operating business. It also creates flexibility at exit: you can sell the operating platform and retain the real estate, or vice versa.
Regardless of structure, the economic engine is the same: patient volume, payer mix, reimbursement rates, and operational efficiency. The legal wrapper just determines how those economics flow.
FAQ
Is behavioral health a good investment in 2025?
Behavioral health remains a compelling area for investment because demand for mental health and substance use services continues to exceed supply, and recent national data show that more than one in five adults experience mental illness in a given year. However, performance varies widely by market and operator, and returns depend heavily on execution in areas like revenue cycle, recruiting, and compliance rather than on demand alone.[ppl-ai-file-upload.s3.amazonaws]
How much does it cost to open an IOP or PHP program?
De novo startup costs for an IOP/PHP can easily reach the mid-six figures once you factor in buildout, furniture and equipment, IT systems, licensing and accreditation fees, and several months of operating losses before payer revenue stabilizes. The largest variables are real estate (new buildout vs existing space), staffing strategy, and how much working capital you reserve to cover the period before credentialing and collections ramp.
What is an MSO in behavioral health?
A Management Services Organization (MSO) is a non-clinical entity that provides management and administrative services to a clinician-owned practice or professional entity. It typically handles billing, HR, facilities, IT, and similar functions in exchange for a management fee, allowing outside investors to participate economically without directly owning the clinical practice in states with corporate practice of medicine restrictions.[nami]
What payers are most valuable in behavioral health?
Commercial insurance plans generally reimburse behavioral health services at higher rates than public payers, and many outpatient and IOP/PHP operators rely on a strong commercial mix to achieve target margins. Medicaid coverage and rates vary significantly by state, and while Medicaid can be an important access point for low-income patients, its reimbursement is often materially lower than comparable commercial rates.naco+1
How long does insurance credentialing take for a new IOP/PHP?
Credentialing timelines vary by payer and market, but official guidance and payer communications commonly cite ranges of several months from application submission to effective date, especially when panels are tight or documentation requires back-and-forth. From an operational standpoint, it is prudent to plan for at least three to six months for major commercial payers and potentially longer for some public programs.[mertztaggart]
What’s the difference between IOP and PHP from an investment perspective?
PHPs generally command higher reimbursement per treatment day because they deliver more hours of care and function as an alternative to inpatient hospitalization, but they require more intensive staffing, more space, and closer physician oversight. IOPs offer lower reimbursement per encounter but can be easier to scale, with more flexible scheduling and lower staffing intensity; many successful programs run both levels of care and step patients between them to balance clinical outcomes and revenue per episode.nami+1
ForwardCare is a behavioral health MSO (Management Services Organization) that partners with clinicians, sober living operators, healthcare entrepreneurs, and investors to launch and scale behavioral health treatment centers. We handle the business side — licensing support, insurance credentialing, billing, compliance, and operational infrastructure — so our partners can focus on growth and clinical quality.
If you’re serious about opening or expanding a behavioral health treatment center but don’t want to navigate the business side alone, ForwardCare may be worth a conversation.