In a difficult financial setting popping out of the COVID-19 pandemic, US well being programs are accelerating diversification methods to take part in new, high-growth healthcare segments and to assist core hospital operations. They’re searching for to concurrently diversify income sources exterior of core hospital operations and construct (or purchase) capabilities that may additionally profit the core—for instance, by bettering affected person entry, high quality of care, expertise, and affordability.
We surveyed well being system executives to be taught extra about their diversification methods (see sidebar “Survey methodology”). Greater than 70 p.c of survey respondents mentioned they intend to take a position extra in diversification over the following three years. This text explores the explanations well being system executives are pursuing diversification methods, the areas by which they plan to take a position, the constructions they might use to assist their diversification aims, and concerns for efficient enterprise constructing.
Diversification may bolster well being system efficiency
At current, hospitals nonetheless characterize the biggest revenue pool within the care supply section; nonetheless, different care segments are rising way more rapidly and are projected to seize an growing share of trade income (Exhibit 1).
In the meantime, trade traits could current challenges for well being programs because the shift to care supply in ambulatory settings accelerates; labor and provide prices quickly escalate in an inflationary setting; insurance coverage protection shifts to authorities plans; and risk-sharing, value-based care fashions proceed to realize momentum.
On account of these difficult fundamentals, trade median working EBITDA margins for not-for-profit well being programs have been steadily however steadily declining, from 11.6 p.c in 2012 to eight.6 p.c in 2020, with no reversal in sight.
In reality, Moody’s has issued a unfavourable outlook for the not-for-profit healthcare sector for 2022.
Nonoperating funding revenue had largely offset declining working revenue, serving to well being programs keep it up regardless of difficult working situations. Nonetheless, as of early 2022, many well being programs skilled substantial funding losses, which, when mixed with rising prices, uncovered the gaps within the programs’ monetary efficiency and prompted executives to step up their diversification efforts (Exhibit 2).
In the meantime, well being programs more and more compete in opposition to well-capitalized incumbents from different healthcare segments and different industries—together with payers, non-public fairness–backed medical teams, pharmacy advantages managers, expertise corporations, and different healthcare companies corporations—which can be aggregating care supply property to create massive healthcare ecosystems.
In reality, 5 of the biggest for-profit healthcare payers have already deployed greater than $120 billion of capital over the previous 5 years on diversified property and can probably proceed to take a position at an accelerated tempo.
Notably, they’ve largely excluded legacy acute care from these investments.
On this setting, well being programs executives more and more understand diversification as vital to their future efficiency and progress. The commonest causes that well being programs executives cited for diversification have been producing money circulation and creating worth and capabilities for his or her core hospital enterprise (Exhibit 3). For instance, a well being system may purchase a risk-bearing main care group, thus creating higher alignment with physicians and bettering continuity of take care of sufferers whereas additionally integrating directors and supporting expertise into different geographies.
Key questions for well being programs pursuing diversification methods
Primarily based on our expertise standing up diversified progress entities in healthcare and different industries, a number of questions and actions may help well being programs optimize the worth of their diversification efforts.
Answering questions associated to the technique (the “what”) and the enterprise infrastructure (the “how”) are early determination factors that may arrange the diversified enterprise for achievement (Exhibit 4).
Modern well being programs are investing according to their progress methods
Well being system investments in diversification usually align with three progress methods: monetizing current capabilities, increasing past acute care, and constructing innovation capabilities (Exhibit 5). Well being system executives can then contemplate the particular pathways to pursue to attain their acknowledged aims. To monetize their current capabilities, for instance, they might remodel a price heart (such because the income cycle or provide chain operate) right into a revenue heart, or they might lengthen internally developed care fashions to different suppliers (as an illustration, hospital-at-home suppliers).
As they pursue methods aligned with their diversification aims, well being programs can select amongst many alternative healthcare segments to focus on for funding. We explored curiosity in these segments within the diversification survey and overlaid the outcomes with our 2021–25 EBITDA progress projections (Exhibit 6).
Certainly, executives are displaying a desire for investing within the highest-growth, most worthwhile segments.
In keeping with the survey, telehealth and distant affected person monitoring is the chance with the best space of focus, with 56 p.c of respondents rating it amongst their high 5 selections, adopted by value-based companies (53 p.c of respondents), ambulatory surgical facilities (36 p.c of respondents), and well being plans (34 p.c of respondents).
When making funding choices, well being system executives can bear in mind what earlier McKinsey analysis has affirmed: high programmatic acquirers create an M&A blueprint or street map that states the place and the way M&A will improve their aggressive benefit.
On this case, for instance, constructing a hospital shared-services platform (thereby reworking price facilities into revenue facilities) or providing cohesive ambulatory care companies—fairly than counting on episodic “huge bang” transactions—is way extra prone to obtain stronger efficiency and cut back publicity to danger.
Most well being programs plan to make use of partnerships to assist their diversification methods
After figuring out their progress aims, the particular methods to pursue them, and the areas by which to take a position, well being programs can discover the assorted methods to construction their investments. At a excessive degree, their choices embrace exterior funding (as an illustration, making a enterprise funding or acquisition) or new-business constructing (for instance, through inner innovation, codevelopment, or the monetization of current capabilities).
Well being programs that decide to make direct investments can enter at an early stage—that’s, seed capital or Sequence A to Sequence C funding—to entry extra modern healthcare corporations through fairness, thus creating strategic worth, equivalent to offering entry to differentiated expertise, expertise, and market insights (Exhibit 7). These investments may create monetary worth: the sale of fairness as valuation will increase and there’s future money circulation if the start-up finally turns into worthwhile. Alternatively, people who purpose to generate more money circulation within the close to time period or defend share in opposition to disruptors usually spend money on late-stage corporations—Sequence D or buyout—to speed up the speed-to-market of the brand new income with extra predictable money flows, thereby creating monetary worth.
Well being programs that search to create capabilities to spice up their core hospital operations could spend money on seed capital or Sequence A funding in healthcare start-ups. With an possession share, the well being system has entry to merchandise and may help form their course. In return, the well being system creates worth for the start-up by offering shared companies, entry to hospitals and affected person populations to check and pilot merchandise, and mentoring and training by means of entry to the well being system’s executives.
Company enterprise capital (CVC) funds are gaining favor throughout industries as a automobile for housing diversification exercise inside massive enterprises. Amongst Fortune 100 corporations, 75 p.c have an lively CVC fund, and in line with Silicon Valley Financial institution, the variety of CVCs grew almost 6.5 instances between 2010 and 2020.
Nonetheless, CVC fund efficiency has been blended, and there’s usually no important relationship between CVC investments and monetary outcomes.
Though reaching monetary success with CVCs is comparatively uncommon and takes longer to manifest than investments within the core hospital enterprise, these funds may be helpful for start-ups and company homeowners alike, with every having fun with entry to recent insights, collaboration alternatives, and capabilities. Finally, the selections well being programs make about how one can construction their participation are knowledgeable by their particular monetary traits and capabilities (see sidebar “Inquiries to information funding choices”).
Given the challenges related to utilizing CVCs as a diversification technique, most well being programs’ approaches to diversification have included partnerships or acquisitions, equivalent to M&A, strategic enterprise investments, or codevelopment with a capital companion. In reality, 82 p.c of well being system executives who responded to the diversification survey count on to companion with others as they pursue their diversification methods (Exhibit 8). Moreover, the shift to care supply in a wide range of new settings favors individuals with distinct capabilities (enhanced by higher nationwide scale), which well being programs can attain by means of partnerships and enterprise constructing—in different phrases, organising a brand new enterprise consortium with a number of well being programs to pursue widespread themes.
Nonetheless, these well being programs have additionally outlined a number of guardrails, reflecting the necessity for a cautious method to type partnerships. Among the many surveyed well being system executives, 57 p.c wish to be majority homeowners, and 19 p.c have a tendency to not prioritize partnerships with non-public fairness or enterprise capital (VC) corporations. Past the necessity to make investments inside these guardrails, joint ventures (JVs) and partnerships current blind spots—for instance, a rush to completion, lack of management continuity, declining dad or mum involvement, and inadequate planning to answer modifications in danger profile—that well being system executives can work to keep away from.
A scarcity of consideration to those nuances has led many efforts to fall in need of expectations.
Finally, income diversification methods ought to create worth for the core hospital enterprise and the communities it serves and may assist the mission, imaginative and prescient, and general technique of the well being system. Well being programs can contemplate jumpstarting their diversification efforts with a serious acquisition or extra funding in inner property, an method taken by profitable business-building organizations.
When selecting areas by which to take a position, these with a transparent path to generate worth for the core (and finally the sufferers) usually tend to resonate with broader well being system stakeholders, together with physicians and nurses. Though the brand new enterprise will probably want some assist from the core (for instance, shared companies), delineating revenue and loss between the 2 entities can help with efficiency monitoring and supply the brand new enterprise with sufficient distance from the core to appreciate its objectives.
Partnerships can speed up progress and will permit well being programs to faucet into in any other case hard-to-access assets or experience. Nonetheless, well being programs may benefit by thoughtfully contemplating the worth they convey to the desk in an effort to safe the fitting companions. Having clear objectives and priorities will likely be necessary, however, as with every start-up, taking an agile, iterative method and recognizing when to remain the course versus when to pivot will probably be vital.
Lastly, we warning in opposition to anticipating monetary worth prematurely; worth creation usually takes time and endurance. Within the meantime, well being programs can acknowledge the opposite advantages to diversification, together with constructing capabilities to higher serve sufferers and increasing data of latest markets.