Hi friend,

Physical clinics are becoming increasingly important in mental health.

In August, Radial acquired Mindful Health Solutions, an outpatient mental health provider with 21 clinics. BrainsWay, a maker of TMS systems, has been actively investing in clinic operators across America in the last 12 months, including Radial itself. LifeStance, which operates more than 500 outpatient centres, is one of the best-performing mental health businesses right now. Quarterly revenue is growing by 26% year on year, and its adjusted EBITDA margin has reached 15.2%.

The picture looks rather different for some of mental health’s digital players. Headspace is reportedly being sold to Sword for $300M, a 90% haircut compared to its 2021 valuation. An article from Axios released yesterday reported that Cerebral, another tele-mental-health provider (that had previously bought Resilience Labs), is seeking a buyer. Several other digital mental health businesses have shut down, merged or been acquired at valuations far below their pandemic-era highs.

Is there something to be learned about the importance of physical clinics from these two tales? And what decisions does that create for digital mental health players?

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The Rise of Interventional Psychiatry

The primary reason for the increased importance of physical clinics is the rise of interventional psychiatry. This is driven both by the emergence of new treatments and by the evolving economics of the market.

Payers are becoming increasingly concerned about rising behavioural-health costs. In response, they are putting pressure on providers and looking to get more return on their spend. Increasingly, they want clearer episodes of care, higher quality care, greater transparency, and better evidence of outcomes. It must also be remembered that they operate on short time horizons for evaluating ROI: savings that take years to materialise are not very attractive when the member is likely to have already moved to another insurer.

Traditional therapy and psychiatry do not always fit neatly into this model. People can end up engaged in care for years, and while that may be what the patient needs, the ROI is not always clear to the payer.

It is also true that some people don’t respond well to therapy or medication. These people are left looking for alternative treatments.

Interventional psychiatry’s great promise is to meet both of these needs — of the patient and the payer, offering treatments that improve outcomes and make a clearer economic case to payers.

Treatments such as esketamine and intravenous ketamine can produce rapid antidepressant effects, often in those who have not responded to other treatments. TMS and newer forms of neuromodulation are expanding the options available to patients, and while not cheap, could offer the clear episodes of care and ROI that payers are looking for — especially with accelerated protocols. Psychedelics are continuing to gain traction and could eventually add another class of treatment.

Several regulatory and reimbursement signals support the rise of interventional psychiatry. John Capecelatro, CEO and Co-Founder of Radial, shared with me how he sees this space.

None of these treatments is a panacea, and evidence varies considerably between them. But they offer solutions desperately needed by payers and patients, and that is supporting their growth.

Interventional Psychiatry Needs Clinics

All of these interventions require physical clinics.

This is the clear explanation for why Radial is acquiring Mindful Health Solutions. MHS has the assets and infrastructure capable of offering interventional psychiatry treatments like TMS, Spravato and intravenous ketamine, and they’ve been doing so since 2009. Capecelatro says combining the organisations allows Radial to build a large brain-medicine network “almost overnight”.

Activity from other industry players is driven by the same motivation. Brainsway is developing their own physical footprint through strategic investments into companies like Axis Integrated Mental Health. Lifestance, a company built on traditional therapy and psychiatry services, is expanding into interventional psychiatry too, seeing it as a way to capitalise on their existing footprint. In their recent Q2 earnings call, Lifestance CEO Dave Bourdon said that;

These services are positioned as meeting the needs of the market, but also offer companies a different margin profile to labour-intensive therapy and psychiatry services. Investors on the Lifestance earnings call were very interested.

Digital Mental Health Faces Some Strategic Choices

There is plenty still to prove when it comes to interventional psychiatry. Many of these treatments are relatively new, expensive or cumbersome to deliver. Their effectiveness varies. A larger menu of treatments is useful only if clinicians can reliably determine which patients will benefit from them — which creates the need for more research, better diagnostics and better clinical support tooling.

Still, if interventional psychiatry grows, then the importance of physical clinics will continue to rise.

This creates an interesting question for digital mental-health companies: what role do they want to play in the physical world?

Perhaps the telehealth world offers a big enough market for them to stay where they are — especially as some competitors get wiped out.

It’s also possible that the market segments itself. Digital players could be increasingly responsible for sub-clinical and mild/moderate populations, while those with physical clinics and interventional psychiatry offerings look after higher-acuity patients.

Some digital players may pivot. Brightline, the paediatric mental-health company, already have. They began opening physical clinics following their strategic pivot in 2024 and now operate five clinics in New York.

New startups may begin innovating in the physical world. Sydney-based Saje just opened the doors of their multidisciplinary mental health clinic that offers an interesting new way to treat patients.

Doing so is not straightforward, however. Clinics are capital-intensive and operationally complicated. Investors in these companies were attracted by visions of software-like growth rates and margins, and of course, the valuations that came with that. Building a clinical footprint could be a step away from these visions.

But physical infrastructure offers something that has proved elusive in digital mental health: defensibility.

In recent years, the telemental health space has become highly competitive and commoditised. Some companies have grown big enough that their scale is a defensible asset in itself. But outside of those few, many have struggled.

Building clinics may not be the answer. But whether they open their own clinics or not, they will need to figure out what role they want to play in a world where physical clinics are increasingly important in mental healthcare.

Meanwhile, those already betting on clinics will need the interventional psychiatry movement to live up to its promise.

If you want exclusive insights into the mental health market and the trends shaping it, consider becoming a Hemingway Pro member. As a Pro Member, you’ll join more than 500 founders, executives, clinicians and investors who get access to deep industry insights every week. You’ll also get access to our private Hemingway Slack group and invites to our member-only events.

That’s all for this week’s edition of The Hemingway Report. As always, please get in touch with any questions or comments.

Keep fighting the good fight!

Steve

Founder of Hemingway