PLAYING THE SHIFT IN CARE DELIVERY: INVESTING IN BEHAVIORAL HEALTH AND POST-ACUTE CARE

As healthcare investors move into 2026, returns across the sector are becoming more uneven. Demand remains strong, but profitability is under pressure. Industry EBITDA as a share of national healthcare spending has fallen from 11.2% in 2019 to 8.9% in 2024, and margins are expected to remain tight in the near term (McKinsey, 2026). Rising labor costs, reimbursement pressure, and policy changes continue to weigh on many providers.

At the same time, not all parts of healthcare are struggling equally. Lower-acuity segments that operate outside the traditional hospital setting are benefiting from long-term shifts toward services that provide recurring rather than episodic patient care. These models emphasize ongoing patient engagement, coordinated care delivery, and predictable utilization. These dynamics tend to align more closely with payer priorities and long-term outcomes.

Within the lower middle market (LMM), behavioral health and post-acute care are two beneficiaries of this shift. Both sectors address patient needs that extend over long periods, support recurring revenue models, and offer meaningful opportunities for operational improvement through technological advancement. For Ironwood, with its focus on building scalable platforms with clear growth drivers, these subsectors appear well-positioned in an otherwise challenged healthcare environment.

The Shift Toward Lower-Acuity, Continuous Care 



Healthcare utilization remains elevated, but care is increasingly moving away from high-cost inpatient settings. Payers and providers are pushing services into outpatient, home-based, and community settings to control costs and improve patient outcomes (EY-Parthenon, 2025).

This shift is increasingly reflected in the economics of different care settings. Institutional, inpatient-heavy care models remain margin constrained, with EBITDA margins expected to recover only modestly from recent lows to approximately 7.6% by 2029, pressured by labor shortages, site-neutral payment risk, and rising administrative costs (McKinsey, 2026). In contrast, lower-acuity, post-acute segments are positioned for faster growth. Home health EBITDA is expected to grow about 6% annually from 2024 to 2029, while hospice EBITDA is projected to grow closer to 9% over the same period, driven primarily by aging demographics, higher Medicare penetration, and more predictable utilization patterns (McKinsey, 2026).

Behavioral health follows a similar pattern. Demand continues to rise as mental health services become more widely accepted, better reimbursed, and more integrated into broader care models. Specialty care revenue, which includes behavioral health, is expected to grow approximately 4% to 5% annually through 2029, outpacing many traditional provider categories (McKinsey, 2026). This sustained utilization growth is making behavioral health an increasingly important and durable component of the healthcare ecosystem.

Behavioral Health: Where Demand Outpaces Capacity

Behavioral health has become one of the more resilient areas in healthcare. Outpatient behavioral services are benefiting in particular, driven by rising utilization as employers, payers, and providers increasingly recognize the cost of untreated mental health conditions. This shift is supporting sustained volume growth across outpatient and hybrid behavioral care models.

Hybrid care models are further strengthening the investment case. According to Fierce Healthcare, companies that combine in-person behavioral care with virtual services are seeing better patient engagement and retention, while maintaining the clinical credibility required for reimbursement (Fierce Healthcare, 2026). These models allow providers to expand reach, improve clinician utilization, and manage costs more effectively.

Despite this growth, access to care remains limited in many markets. Ongoing provider shortages and capacity constraints have created a supply-demand imbalance that supports long-term utilization growth and pricing stability across outpatient and hybrid behavioral platforms (McKinsey, 2026).

For LMM investors, behavioral health platforms offer recurring revenue, strong demand visibility, and clear operational levers. Many assets remain founder-led and under-digitized, creating opportunities to improve scheduling, intake, and care coordination through relatively straightforward operational enhancements.

Post-Acute Care: Aging, Access, and Care at Home

Post-acute care is one of the clearest beneficiaries of demographic trends and changes in care delivery. As the population ages, demand for home-based and community care continues to rise. The share of Americans aged 80 and older is expected to increase from 4.2% in 2024 to 5.2% by 2029, adding meaningful pressure to post-acute utilization (McKinsey, 2026).

Within the post-acute landscape, home health and hospice stand out. Home health EBITDA is projected to grow about 6% annually from 2024 to 2029, supported by Medicare Advantage growth and patient preference for care at home. Hospice is expected to grow even faster, with EBITDA increasing around 9% annually over the same period (McKinsey, 2026).

Policy trends also support this shift. The Rural Health Transformation Program, created under the One Big Beautiful Bill Act, will direct $50 billion over five years toward improving access and care delivery in underserved areas. Much of this funding supports home health, mobile care, and hybrid delivery models, adding another tailwind for post-acute providers (McKinsey, 2026; Fierce Healthcare, 2026).

Technology as a Tool, Not the Business

Technology is becoming essential across healthcare, but in behavioral and post-acute care it plays a supporting role. According to McKinsey, 85% of healthcare organizations are investing in or piloting generative AI, primarily to automate documentation, scheduling, and revenue cycle workflows (McKinsey, 2026).

These tools improve efficiency and reduce administrative burden, but they do not replace the human delivery of care. Platforms that use technology to support clinicians, rather than substitute for them, tend to align better with payer expectations and regulatory requirements.

In post-acute care specifically, technology adoption is increasingly driven by compliance. Electronic Visit Verification (EVV), a federally mandated requirement designed to reduce fraud and ensure service delivery, has accelerated the adoption of point-of-care technology across home-based care models. While EVV itself is not a growth driver, it often serves as a catalyst for broader workflow digitization, improving documentation accuracy, billing compliance, and operational visibility.

For lower middle market platforms, this can create meaningful value creation opportunities. Many businesses remain under-digitized, and relatively modest investments in workflow automation and data infrastructure can drive meaningful operational improvement and margin expansion.

M&A Dynamics Favor the Lower Middle Market

Healthcare M&A is expected to rebound selectively in 2026, with buyers focusing on assets that offer predictable demand and limited reimbursement risk (PwC, 2025). Behavioral health and home based post-acute care fit this profile well.

Both subsectors remain highly fragmented, with many smaller operators lacking scale, professional management, or modern systems. This fragmentation supports consolidation strategies, particularly in regional markets. In addition, lower-acuity care models typically require less capital and face fewer regulatory hurdles than hospital-based assets (EY-Parthenon, 2025).

Exit options are also expanding. Strategic buyers, including payers and provider networks, are increasingly interested in controlling post-acute and behavioral assets to manage costs and improve outcomes. Larger private equity platforms are also active acquirers as they look to scale proven models.

Implications for Lower Middle Market Investors

In 2026, successful healthcare investing requires focus. Broad exposure to traditional provider models offers limited upside amid policy uncertainty. Behavioral health and post-acute care, by contrast, benefit from strong demand, favorable payer dynamics, and long-term shifts in how care is delivered.



These industry dynamics are expected to support compelling investment opportunities for Ironwood to support both sponsors pursuing control investments and management teams seeking growth capital. Flexible capital can enable the operational, technological, and expansion investments required to scale platforms in behavioral health and post-acute care.  

We are excited about the opportunities we see in the healthcare industry and are actively evaluating investments aligned with this thesis. To learn more, please visit our website and reach out to one of our team members.

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Sources

Fierce Healthcare. (2026). 2026 Outlook: Hybrid care companies poised for growth driven by economic, policy tailwinds.

McKinsey & Company. (2026). What to expect in US healthcare in 2026 and beyond.

EY-Parthenon. (2025). Healthcare sector outlook: Growing amid headwinds in 2026.

PwC. (2025). US Health Services Deals 2026 Outlook.

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