Sector Report

Key Take-Aways on the Substance Use Disorder Space Rising Relevance of Managed Care.

Read our full take in the report here.

We see the substance use disorder (SUD) space as one of the most rapidly evolving verticals within broader healthcare services. Our recent conversations with executives of SUD providers and private equity investors highlighted THREE (3) interrelated trends: 1) a rising relevance of managed care, 2) a need to prepare for greater value-based reimbursement, and 3) a growing pressure to play catch-up with information technology. In our opinion, these trends create opportunities for SUD providers to competitively differentiate themselves and pursue greater economies of scale in their operations.

1. Rising Relevance of Managed Care. We see the relevance of managed care for SUD providers increasing on the heels of new “behavioral health parity” regulations in September 2024. There seems to be a consensus view among the SUD executives that we have spoken with that the “cash pay” segment of the SUD market is going away with more patients now being covered under managed care arrangements. With greater managed care coverage will come increased pressures on traditional fee-for-service reimbursement rates, a greater focus on lower-cost modalities of treatment (e.g., outpatient, IOP, and PHP, etc.), and heightened quality and compliance oversight.
2. Preparing for Value-Based Reimbursement. It is certainly early days for value-based reimbursement in the SUD space with the average provider generating less than 10% of its revenues from value-based reimbursement arrangements, by our conversations with SUD executives. However, we think SUD providers can get a head start defining their own financial futures by proactively restructuring their operations and investing in key information technologies now. In our opinion, this would include better integrating with mental health and primary care and adding lower-cost outpatient and telehealth services. Ultimately, we think that SUD providers should proactively embrace value-based contracting as a way to capture the full economic value of their services.
3. Focusing on Information Technology. We see a much stronger use case for electronic health record software and information technology in the coming years driven by new privacy regulations and labor shortages. Many of the SUD executives we have spoken with have argued that the onerous privacy rules for SUD patients have been a contributor to the relatively slow adoption of IT in the SUD space. Newly released privacy regulations should allow SUD providers to coordinate patient care in a much less burdensome way. At the same time, ongoing labor shortages have forced SUD providers to consider information technology to boost staff productivity. Finally, use cases for artificial intelligence are “top-of-mind” for almost every executive we have spoken with. Most interesting is the potential for conversational/generative AI to more directly deal with patients — beyond just automating administrative tasks.

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