Way forward for US healthcare post-COVID-19

Way forward for US healthcare post-COVID-19

Health Care Industry

Two years of the COVID-19 pandemic have shifted the dynamics within the US healthcare worth chain. The years from 2020 by way of 2021 had been difficult for payers and suppliers. On the identical time, innovation and development continued unabated in providers. Prospects over the subsequent few years appear favorable, though persistent inflation in client costs might dent the outlook. Restoration in profitability partly explains this constructive outlook. One more reason for optimism is the potential for scaling up innovation that was prompted by strain the pandemic placed on the healthcare system. Additionally, acceleration of value-based care fashions and rising software of expertise throughout the healthcare trade are more likely to proceed in the long run.

Variability in development throughout totally different components of healthcare persists and, in some circumstances, has turn into extra pronounced. For instance, authorities strains of enterprise proceed to account for the most important development areas for payers. Care-delivery providers exterior the hospital are the quickest rising companies for suppliers, given the continued shift to the non-acute setting. Meantime, the development of value-based care and associated danger funds in addition to digitization of the worth chain is shifting worth creation throughout, reasonably than inside, conventional healthcare subsectors.

{The marketplace} has begun to handle the affected person’s full well being journey, resulting in improved affordability, high quality, entry, and expertise.

Many gamers, spurred by vital funding, are innovating their enterprise fashions to create worth and seize a few of it in enhanced margins. On this article, we’ll overview the shifts in healthcare revenue swimming pools, sit up for how they could evolve, and look at how the pandemic has stimulated adjustments in trade enterprise fashions.

Shifts in revenue swimming pools proceed to speed up

Healthcare trade EBITDA grew 5 p.c pre-COVID-19 (between 2017 and 2019) and remained flat over 2020 and 2021. We estimate post-COVID-19 (between 2021 and 2025) development at 6 p.c (Exhibit 1). If the trade achieves this fee of development, it might add about $31 billion in earnings

between 2021 and 2025. Now we have not factored within the potential impression from macroeconomic headwinds, together with persistent client inflation, in these estimates; earnings might decline by greater than $70 billion throughout this era if inflation continues unchecked.

Way forward for US healthcare post-COVID-19

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The post-2021 restoration and shifts in revenue swimming pools are more likely to be pushed by a number of components, together with the next.

Evolving payer combine

Payer revenue swimming pools are anticipated to shift considerably towards authorities segments, led by the expansion within the over-65 inhabitants and recognition of Medicare Benefit over conventional fee-for-service Medicare. Additional, because the financial system recovers from the impression of COVID-19, we estimate that payers’ mixture of enterprise might shift from Medicaid to industrial (the share of business lives in complete enrollment might improve by one to 1.5 proportion factors through the 2021 and 2025 interval, with nearly all of the shift coming from Medicaid), thus rising common reimbursement charges and enhancing margins for suppliers.

Shifts in websites of care

The COVID-19 pandemic has accelerated the motion of care from high-cost acute and post-acute websites to lower-cost freestanding and non-acute websites, together with elevated demand for home-based providers and digital care. Non-acute websites have decrease prices and better EBITDA margins, 15 to 25 p.c in comparison with 8 to 10 p.c for acute and post-acute services.

We estimate that hospitals’ share of total supplier income might decline from about 47 p.c in 2019 to about 44 p.c by 2025, whereas the share of house and ambulatory websites will improve by one to 2 proportion factors every over the identical interval. This shift might improve total margins for the supplier sector (though outcomes will diverge, relying on a supplier’s enterprise combine) whereas concurrently lowering total value of care, thereby probably enhancing payers’ margins as nicely. For instance, reimbursement for surgical procedures carried out at ambulatory surgical procedure facilities is 25 to 50 p.c decrease than at hospitals, in line with claims information.

Exacerbation of continual circumstances

The continual illness burden has been rising for years and can proceed because the variety of older folks grows. Throughout the pandemic, many sufferers delayed or skipped needed care, together with doctor visits and medical exams. As well as, many reported an rising variety of challenges associated to their psychological well being. Price of care was anticipated to rise by about $10 billion in 2021 (0.4 p.c of supplier income) because of worsening continual circumstances in addition to larger prevalence of circumstances like continual obstructive pulmonary illness in extreme COVID-19 sufferers. These will increase ought to sluggish however we estimate that value of care might nonetheless be larger by about $7 billion by 2025, accounting for pure illness development for sufferers with continual circumstances.

How healthcare revenue swimming pools will evolve

On this part, we focus on how earnings swimming pools for payer, supplier, healthcare providers and expertise (HST), and pharma providers are more likely to evolve in coming years based mostly on our projections.

Payers: A shift towards authorities segments

Payer revenue swimming pools have fallen, from $54.7 billion in 2019 to $40.1 billion in 2021, however are anticipated to rebound by 2025 to $57.4 billion. The subsequent few years might see a return to pre-COVID-19 profitability, with payer revenue swimming pools rising at a 9 p.c CAGR.

Nonetheless, the combo of total payer revenue swimming pools is more likely to proceed to shift towards authorities segments. Fast development within the over-65 inhabitants and its elevated adoption of Medicare Benefit might account for this alteration (from 43.6 p.c in 2021 to about 52 p.c penetration in 2030 within the Medicare inhabitants) in addition to improved profitability of managed Medicaid as a result of extra coordinated and built-in care (Exhibit 2).

Because the labor market recovers post-COVID-19, substantial enrollment is predicted to maneuver from Medicaid to particular person and industrial markets however is more likely to be greater than offset by development in managed Medicaid. We estimate that annual managed Medicaid income development can be 5.3 p.c between 2021 and 2025 in contrast with 3.7 p.c between 2017 and 2019. The longer term development is predicted to come back from the general persevering with shift from fee-for-service to managed care, in addition to a rise in premiums per member from development of membership with extra advanced care wants (for instance, managed long-term providers and help applications).

Estimated revenue swimming pools for the federal government segments can be about 20 p.c bigger than industrial segments by 2025; they’re about 10 p.c decrease at the moment. The person market is more likely to expertise the most important absolute lower in EBITDA margin as a result of larger medical-loss-ratio rebates payouts and elevated competitors.

Suppliers: Rising earnings however shifts from acute websites of care

Supplier revenue swimming pools dropped as a result of lack of quantity and shift in payer combine from industrial because of falling employment through the pandemic. However CARES Act funding helped to help supplier outcomes. Revenue swimming pools fell from $254 billion in 2019 to $250 billion in 2021. The supplier outlook is constructive, with earnings anticipated to rise to $326 billion in 2025, a 7 p.c CAGR.

We estimate that there can be total affected person quantity will increase, spurred by the ageing inhabitants. The variety of folks above 65 is predicted to develop 3 p.c from 2021 to 2025 in contrast with about 0.5 p.c for the inhabitants as an entire.

Suppliers are more likely to see a shift in payers, a change that would have an effect on reimbursements. For instance, many ageing employees will transfer from industrial plans into Medicare, leading to a discount in total reimbursement by about 0.5 p.c of absolute EBITDA {dollars}. That change will doubtless be balanced partially by the motion of individuals from Medicaid into industrial—we estimate that the share of People on Medicaid is more likely to fall from 25 p.c in 2021 to about 22 p.c in 2025 as a result of redetermination of beneficiary eligibility.

A much less apparent growth is the shift from acute websites of care, which have decrease margins than most different websites of care exterior of the hospital. Non-acute websites have decrease prices and EBITDA margins two to 3 instances larger than the acute care setting. The pandemic has pushed the shift to non-acute settings, given the hospital backlog and affected person and physician choice for extra handy and digital care. Now we have additionally seen underlying enterprise shifts such because the accelerated adoption of value-based care. Many value-based gamers might ship decrease prices and higher outcomes in addition to understand margins of greater than 15 p.c in main care and specialty fashions.

Healthcare providers and expertise: Lengthy-term development supported by software program and platforms

The HST phase has been a long-term development story. HST continued its development trajectory through the pandemic, with revenue swimming pools rising from $45 billion in 2019 to $50 billion in 2021. The outlook continues to be constructive. We estimate that the phase will develop at an 8.2 p.c CAGR between 2021 and 2025, to about $70 billion by 2025. That will doubtless make it greater than the payer earnings pool by 2025.

HST has had broad total development however software program and platforms and information and analytics have carried out particularly nicely, with CAGRs of 10 p.c and 17 p.c, respectively. Enterprise mannequin shifts for payers and suppliers account for a lot of that development.

The speedy adoption of information and superior analytics and software program is spurring innovation in areas comparable to inhabitants well being administration, income cycle administration, and affected person engagement. Moreover, digital well being—take-up of which elevated considerably through the pandemic however since stabilized—is accelerating care-model innovation and expertise options.

Pharma providers: Extra spending, led by the specialty medication

Pharmacy providers have undergone main adjustments in recent times, together with new fashions of affected person engagement, institution of partnerships throughout stakeholders, and the doorway of latest digital pharmacy fashions. Drug spending has elevated, with shelling out income rising from $450 billion in 2019 to $500 billion in 2021. The expansion was primarily pushed by specialty medication, which now account for 40 p.c of shelling out income.

Continued innovation in drug growth might increase specialty revenue swimming pools additional; these are anticipated to extend at an 8 p.c CAGR from 2021 to 2025.

Hospital-owned specialty pharmacies have expanded their participation, with practically 40 p.c of provider-owned pharmacies attaining accreditation.

In infusion-related worth swimming pools, COVID-19 accelerated site-of-care shifts, enabling development in house infusion as sufferers decreased in-person visits to hospitals. Moreover, payers have gotten extra directive in shifting infusion therapies from hospital outpatient settings to lower-cost websites of care comparable to the house and ambulatory infusion facilities, additional accelerating quantity shifts.

Conventional drug dispensers comparable to retail and mail pharmacies proceed to face margin strain, resulting in a contraction of revenue swimming pools. New technology-enabled pharmacies have emerged, that includes direct-to-consumer fashions with digital prescription administration, automated workflows, and sooner house supply providers. Though these gamers haven’t but reached substantial market share, they’re rising shortly, spurred by substantial personal fairness funding. Competitors from these gamers might promote innovation round comfort and expertise within the enterprise fashions of bigger retail and mail pharmacies as nicely, creating potential margin upside.

The wholesaler phase continues to profit from elevated drug spending. We estimate that drug distribution income is more likely to improve at a 5 p.c CAGR from 2021 to 2025; wholesalers’ revenue margins from drug distribution are anticipated to stay flat over the approaching years.

Exterior of total specialty development, the pharmacy profit managers (PBMs) phase is underneath strain for extra transparency into rebates and community unfold pricing from payers and sponsors. Employer demand for value containment and predictability has given rise to a wave of latest and progressive pricing fashions. Specialised gamers (comparable to specialty drug managers, remedy administration, profit optimizers, and pharmacy profit directors) at the moment are taking over some PBM capabilities. Within the face of those tendencies and commoditization, PBMs have launched group buying organizations (for instance, Ascent Well being Companies, Zinc Well being Companies, and Emisar Pharma Companies) to raised negotiate with drug producers. They proceed to take a position to enhance employer and worker expertise and ramp up efforts to raised handle medical profit specialty medication.

The expansion in drug spending, together with the rise of specialty medication, has centered rising consideration on the position of pharmacy in coordinating look after sufferers. Of explicit curiosity is the usage of pharmacists and affected person providers in selling larger adherence to remedy regimens and offering medication-related counseling. Payers, PBMs, and dispensers alike are specializing in lowering the overall value of care and pursuing enhanced affected person outcomes and expertise.

Evolving enterprise fashions

These shifts in trade economics are prompting enterprise mannequin change in three areas—diversification, vertical integration, and new enterprise constructing.


Because the trade revenue swimming pools diversify, healthcare gamers are reviewing the scope and scale of their enterprise strains. They’re increasing their scope of providers to adjoining segments in addition to constructing companies to monetize capabilities.

Hospital techniques have been increasing throughout the care continuum, accumulating property in ambulatory websites, digital and digital well being, main care, and post-acute care. A majority of the online affected person service revenues of the most important 50 hospital techniques at the moment are exterior inpatient care. Along with outright acquisitions, hospital techniques are pursuing partnerships with innovators in these areas, together with main care disrupters, risk-bearing administration providers organizations (MSOs), and digital care corporations.

Others in care supply are transferring to diversify as nicely. For instance, house well being and hospice corporations are increasing into extra subtle care supply like hospital-at-home. Pharmacy gamers are scaling their primary-care companies with acquisitions of doctor and clinic property, together with value-based doctor gamers. Introduced investments appear to recommend a considerable enlargement into main care and value-based care nicely past the retail clinics house they’ve entered beforehand.

As gamers construct new capabilities, they’re recognizing that these capabilities can turn into massive, worthwhile companies in their very own proper. Many payers have created HST companies of their very own to each serve their core payer enterprise and promote these providers to different healthcare gamers. For instance, payers are constructing MSOs to take a way more lively position in managing the care of their sufferers. This sort of diversification has two advantages: it addresses new worth swimming pools whereas probably creating worth for the core payer enterprise by lowering complete value of care by way of extra sturdy analytics and reporting and improved care coordination to extra successfully take care of sufferers.

Additionally, a number of supplier techniques have launched enterprise funds geared toward diversifying the core enterprise into engaging income swimming pools comparable to information and analytics; some have created start-up incubators to construct a variety of digital well being services. Different well being techniques are beginning and increasing specialty pharmacies. About 20 p.c of accredited specialty pharmacies at the moment are owned by well being techniques and hospitals. Hospital-owned pharmacy applications have unlocked a brand new, rising income stream whereas demonstrating improved affected person outcomes and expertise by way of their built-in care applications, highlighting sooner time to remedy and improved adherence charges amongst its specialty affected person inhabitants.

Vertical integration

The continued speedy enlargement of value-based care fashions is resulting in realignment throughout the healthcare worth chain. The realignment is in pursuit of fashions that may higher ship affordability, high quality, enhanced entry, and expertise of care but additionally holds the promise of superior financial returns. Payers, for instance, are innovating their Medicare Benefit enterprise to maneuver past offering simply the well being plan to possession and orchestration of care fashions inclusive of doctor practices, digital care, house care, and pharmacy in addition to care administration, remedy adherence, and different enablement providers. These fashions are more and more powered by data- and analytics-enabled scientific providers comparable to care coordination and enhanced member engagement. Such an strategy could supply superior care to members whereas increasing the revenue pool out there to payers by two to 3 instances (Exhibit 3). To entry these capabilities, payers are pursuing acquisitions, minority investments, and partnerships with personal fairness companies.

On average, Medicare Advantage can create substantial value, which can be reinvested for members.

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New enterprise constructing

Personal fairness and enterprise capital gamers are persevering with to extend funding in healthcare; in 2021, they invested over twice as a lot as they did seven years in the past. “Platform creation” is the funding thesis for a lot of of those healthcare investments—figuring out alternatives to create worth past the rapid asset by way of M&A and enterprise constructing (Exhibit 4). The monetary sponsors are constructing the enterprise, then leveraging a platform to create a extra expansive set of choices. In lots of cases, this strategy finally ends up remodeling the underlying enterprise.

Private equity and venture capital deals in 2022 across the healthcare ecosystem.

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For instance, throughout COVID-19, a non-public equity-owned, home-based supplier constructed out a scientific trial inside a couple of months to facilitate vaccine trials, enrolling 5 instances the variety of numerous individuals in comparison with regular approaches, based mostly on our expertise. In one other case, a supplier of non-emergency medical transportation expanded into dietary meal-delivery providers for high-need and high-risk sufferers.

This excessive velocity of innovation is upending the incumbent healthcare gamers’ conventional strategy of remodeling or incrementally including to present enterprise fashions. As a substitute, enterprise reinvention has turn into a vital precedence. Whereas the strategy contains making anchor acquisitions, it should additionally usually depend on high-speed enterprise constructing to benefit from incumbent property and quick scale-up to make a distinction to their enterprise. Many are pursuing this mannequin. For instance, one pharmacy providers participant created a digital pharmacy from scratch inside a 12 months. In one other occasion, a big healthcare participant constructed a whole value-based care enterprise in 18 months.

As monetary circumstances have tightened, we’re seeing a pullback in healthcare funding from enterprise fashions not but delivering measurable outcomes. On the identical time, there’s an combination improve in funding urge for food to assist scale progressive fashions which are exhibiting constructive outcomes. Latest healthcare-focused fundraising for personal fairness continues to show substantial momentum. This bodes nicely for funding progressive fashions in newer areas comparable to specialty value-based care, in addition to scaling innovation in additional established segments comparable to primary-care-centered, value-based care and HST.

The competencies required to function these enterprise fashions are new and infrequently fairly totally different from these wanted to run the core enterprise. Healthcare leaders could wish to fastidiously think about the way to improve their group’s capabilities to hold out their enterprise mannequin reinvention plans. New competencies embrace:

  • Programmatic M&A. Most progressive corporations in healthcare are small to midsize and infrequently centered on comparatively slender options. As such, programmatic M&A is necessary for constructing new companies, diversification, or vertical integration. No healthcare group has the bandwidth of expertise or scale of capabilities required to organically construct these fashions in a well timed and efficient vogue. Certainly, throughout industries the programmatic M&A strategy delivers probably the most worth creation, in line with McKinsey analysis.
  • Efficient integration. The thesis of programmatic M&A is the speedy scale-up of progressive enterprise fashions and never conventional synergy seize. As such, the mixing strategy adopted by acquirers doubtless must allow speedy scale-up of the core operations of the acquired firm, incorporate the capabilities of the acquired entity with the core enterprise, and allow integration of a number of acquisitions right into a broader “platform enterprise.” Programmatic acquirers develop an “all the time on” integration functionality in contrast with the bespoke integration infrastructure in most massive offers. Creating a programmatic integration competency is more and more necessary.
  • Fast-fire enterprise constructing and scaling. Enterprise-building functionality is a key part to achieve this new surroundings. New companies usually have to be constructed when an applicable acquisition choice doesn’t exist or isn’t economical. Repeatable, profitable innovation requires a devoted engine that may construct promising ventures into rising companies. In our expertise, the management staff and expertise in these new companies are key differentiators. Dad or mum firm administration can respect that these companies usually have totally different financial fashions, kinds of workers, and nature of operations. Subsequently, the governance of those companies ought to be meaningfully totally different than a enterprise unit throughout the core.

The COVID-19 pandemic has had a profound impact on the healthcare trade, from shifting revenue swimming pools to a spike in innovation to the creation of latest enterprise fashions. Payers, suppliers, HST gamers, and pharma providers companies are going through huge choices about what sort of corporations they wish to be within the coming years. Even because the pandemic continues, now could be the time to make strategic decisions and probably huge bets. Acquisitions and new enterprise constructing will more and more be key success components.