As we start the new year, it’s interesting to reflect on the post-pandemic healthcare environment and to consider how healthcare will continue to evolve in 2023. Admittedly, this exercise is far more art than science. A year ago, we reflected on what the COVID-19 journey has taught the healthcare industry and how the industry transformed during a highly volatile period. We made some interesting, but not too highly controversial prognostications for 2022 – the industry would continue its momentum in virtual health, continue a focus on finding lower cost of care settings, and look to improve the supply chain to deliver more flexibility. There has no doubt been a consistent focus on these areas over the last year and we will see more of the same into 2023.
In our own self-assessment, however, we did not anticipate the broader headwinds that record inflation, a tightening credit market, and a more protracted bear market for public equities would bring. In all, these forces have created a more measured and cautious environment for healthcare investment, innovation, and consolidation in 2022. Despite a dip in market activity and M&A in 2022, after unprecedented M&A volumes in 2021, we are seeing preliminary indications that M&A activity will be stronger and return to more optimistic levels of activity in the coming year.
As we think about 2023, TripleTree is focused on several macro themes that will influence and shape healthcare, requiring careful navigation to achieve success in the coming year:
- Inflationary trends in healthcare and how the industry will leverage investments and innovation to mitigate rising costs
- Accelerating market activity and interest in end-to-end healthcare – from hospital to home and the search for lower cost of care settings
- The intense race to own and integrate primary care delivery models and capabilities
- The wind-down of the Public Health Emergency and the resulting changes to public policy that have fueled innovation during the COVID-19 pandemic
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Theme 1: Innovating to lower healthcare costs in an inflationary environment
The effects of four-decade high record inflation rates have impacted every area of our economy, from rising food prices, painful energy cost increases, increased cost of building supplies, and just about anything that consumers or manufacturers touch. With current annual inflation rates
hovering around 7.1% , both the U.S. and the broader global economy are experiencing inflation rates that outpace historical averages. While the rate of increase of inflation has slowed and even fallen back more recently, most economists agree that higher inflation rates will be with us for some time.
Interestingly, while healthcare has not been immune to inflation, costs in this industry have been increasing at a notably lower rate
than most other sectors of the economy. The current rate of medical care inflation is roughly 5.0% compared to broader inflation rate of 7.1%. This is interesting reversal of historical precedent, where healthcare cost inflation typically outpaces inflation for the broader economy.
Have we finally found the magic bullet to “bend the cost curve”? Not quite. In fact, due to nuances in how healthcare costs are negotiated, insurance premiums are set, and the intricacies within the healthcare supply chain, lower than expected healthcare inflation is driven by a time delay in inflation’s impact on healthcare rather than a reflection that this industry has suddenly gotten better at controlling costs. Supply chain and cost increases could take twelve or more months to work their way through the healthcare system before employers and consumers really notice inflation’s impact. To put it another way – the healthcare industry is likely going to feel the delayed impact of inflation in 2023 in a more significant way than it has to this point in the current economic cycle. We anticipate inflationary pressures to be most pronounced in the following areas:
- Clinical wage pressures: COVID-related labor issues clearly had an impact on wages, but broader inflationary trends will likely keep industry labor rates higher than pre-pandemic periods. We have seen significant wage pressures across the continuum of care from hospitals to home health. Labor is one the single largest healthcare spend categories (sometimes exceeding 50% of total expenses) and labor cost pressures will have downstream implications across all healthcare costs. While some wage pressures are easing from peak COVID-19 levels, they are still well above where they were before the pandemic. We expect to see continued investment to better manage contract labor costs, in training, human capital management (HCM), and workforce automation solutions to make sure clinicians are practicing at the top of their licensesand improve clinician workflow efficiency. Clinical staffing firms such as AMN, CCH and Jackson Healthcare are working with their hospital clients to better manage through the labor shortages and wage inflations, while care delivery organizations are looking to those vendors and others like Hallmark Health Solutions, RLDatix, IntelyCare, ShiftKey, ConnectRN and symplr to better manage staff labor across internal and external tools. Some larger systems, such as HCA, are investing or acquiring their own nursing schools to improve their clinical recruitment pipeline. The labor issue is not just hospital focused, but everywhere along the care continuum.
- Non-clinical wage pressures: Care delivery will continue to see wage pressures for non-clinical staff as well. Like the clinical labor space, staffing and wage issues continue to have impact in other areas of labor spend. On this front, we are seeing the accelerated use of outsourcing and investment in technology automation especially in the areas of AI/ML (artificial intelligence and machine learning) and RPA (robotic process automation) in clinical documentation, coding, and the revenue cycle process. Several revenue cycle vendors have affirmed these trends including our discussions with Ensemble, CorroHealth, AGS Health, and Health Prime. We are hearing similar feedback from specialty RCM providers like Revecore, Elevate PFS, and EnableComp.
- Increased manufacturing, supply chain and operational costs: Every healthcare provider is struggling with increasing operating pressures, especially as vendor contracts come up for renewal. Previous strategies to win concessions on costs because of COVID-19 may not work as well going forward and the non-labor costs of delivering care will likely also experience inflationary pressures in the near-term. Medical equipment and consumable suppliers are feeling the pains of supply chain inflation and the industry should expect to see additional supply chain costs in 2023 while vendors like symplr, GHX, PartSource, and SpendMend, as well as the GPOs, are all working on helping improve the procurement process and manage spend.
- Provider cost increases: As providers begin seeing their margins squeezed, they in-turn will look for improved contracting terms when renegotiating with insurers. We are already hearing that providers looking for 5% percent rate increases are becoming commonplace with some requests closer to 15% depending on the market and service.
- Insurance premium increases: As care delivery costs rise and provider organizations re-negotiate contracted rates with the insurance companies, insurance premiums will likely rise significantly above historical levels. We have already seen impacts in 2023 premiums, sometimes upwards of 7%, but even larger increases could very likely come in 2024. Commercial rates are finalized in the fall, so while 2023 premiums are locked, our intelligence indicates that providers have asked payers for significant rate increases and those may not fully manifest until 2024 rates are set.
What does this new reality mean for innovative companies and healthcare M&A in 2023? Some experts, including an analysis by McKinsey and Company
, estimate that excess healthcare expenditures are likely to be $370 billion by 2027 compared to previous cost projections made prior to the COVID-19 pandemic. There is no doubt this staggering projection represents a huge incentive that will drive significant investment and innovation as the best minds come together to find creative ways to take costs out of the system and drive higher levels of productivity. In particular, we anticipate the market will be interested in companies that can deliver real ROI and fuel growth across a few important industry cost drivers:
- Smarter staffing strategies with a more careful balance of contracted labor and optimized internal labor pools
- Improved analytics across the supply chain to better understand costs, improve sourcing, and more fully utilize existing inventories
- A continued focus on RCM, especially as patient financial responsibility increases and as consumers feel the squeeze of the economy across other areas of spend. A recent Centers for Medicare & Medicaid Services (CMS) report looking at 2021 healthcare spend data shows patients’ out-of-pocket spending increasing more than 10% in 2021 – a faster rate of growth than any other period in the last 40 years
- An increasing willingness to outsource solutions to specialized vendors, especially those with demonstrable ROI models
- Significant investments in HCIT that accelerates the shift towards improved automation and operational efficiency. A recent report from Bain & Company and KLAS research shows healthcare providers plan significant software spending in 2023, with 80% of providers indicating healthcare IT is a top-five strategic priority
- Increasing focus on value-based contracting approaches where providers can find additional financial incentives/upside to delivering quality care at lower costs
- Innovative care models driving care to lower cost of care settings
Theme 2: The next wave of post-acute care
We all know it, our healthcare ‘system’ is not a system at all. It is comprised of a fragmented web of players focused on their respective parts in the process. While this characterization may be overly simplistic, this reality has triggered the push towards a more systemic approach, with the shift to value-based care, the focus on consumerism, and the push towards transparency becoming important industry drivers. As we think about the coming year, this momentum towards a more end-to-end approach to healthcare will continue – with continued market attention and focus on post-acute and primary care.
Post-acute care providers, who are serving patients in the lowest cost of care settings, have been the clear beneficiaries of the ongoing reassessment of where healthcare should and can be delivered. However, inflationary pressures across the healthcare ecosystem highlight the opportunity to push this further, to rethink not just where, but how
post-acute care is delivered.
Despite significant investment across payers, post-acute providers, and provider IT vendors, post-acute care delivery remains highly fragmented, with limited (but improving) coordination across payers, health systems, and post-acute providers. The lack of coordination has been exacerbated by the fact that these stakeholders often have misaligned or competing incentives.
The ability to align both clinical and financial incentives across these constituents represents a significant opportunity to reduce costs, reduce readmissions, and improve overall care coordination. Given the significant opportunity this represents for both payers and post-acute providers, we expect to see continued investment and innovation across clinical post-acute tools that support value-based care initiatives, the blurring role between payer and provider (aka “payviders”), and consolidation across ancillary in-home care delivery businesses to create more comprehensive in-home care delivery models.
For post-acute providers, the market remains highly competitive, and it can be challenging to demonstrate a truly differentiated service offering. Within home health specifically, the ongoing enrollment shift from Medicare fee-for-service to Medicare Advantage (MA) has been particularly challenging, as contracts with MA payers nearly always represent a discount to the episodic rates paid by traditional Medicare.
Moving these lower margin MA contracts to value-based arrangements where financial incentives can be earned represents a significant source of potential upside. Solutions that allow providers to leverage analytics to drive actionable clinical insights, such as Medalogix
, create opportunities to enhance care delivery and patient outcomes in a measurable way. We expect to see increased adoption of, and investment in, such solutions as providers look to better position themselves in the ongoing shift to value-based care within the post-acute end market.
For payers, where post-acute care is a large and growing line of spend, they are looking for better patient visibility and oversight as patients transition in and out of post-acute care. The ability to manage total cost of care with little to no gaps in data allows payers to better control both quality and cost in real-time. Some payers have elected to manage this through an intermediary, such as Professional Health Care Network
, which manages a network of home health providers and partners with payers to manage the home health benefit. We expect to see further expansion in this convener model between payers and providers.
In other situations, payers have elected to bypass a post-acute convener and acquire their own post-acute provider to better control the post-acute benefit for their members. The most recent example of this is Optum’s
March 2022 announced acquisition of LHC Group
, a top three post-acute provider serving 37 states, for $5.4 billion in cash. The transaction represents an opportunity for Optum to extend its value-based capabilities into post-acute to create coverage across the full continuum of care. For scaled post-acute providers, selling to a payer is increasingly becoming an attractive exit option.
As post-acute providers seek to differentiate themselves, and payers look to find additional ways to keep patients in their own homes longer, there is an increasing focus on opportunities to create a more comprehensive home-based care delivery model beyond just clinical care. This model augments in-home healthcare delivery with ancillary solutions and support, such as nutritional care, non-emergency transportation, and durable medical equipment (DME), among others. We expect to see consolidation in this area as post-acute providers and payers look to wrap a more holistic set of in-home care delivery services around patients.
Theme 3: Fortifying the central role of primary care in end-to-end healthcare
The push to innovate in lower cost of care settings and develop more systemic healthcare is not just limited to the home setting. 2022 saw significant investment and consolidation in primary care settings, with major health plans and retailers staking their claim in the battle to influence where and how care is delivered and under what type of reimbursement model. In the last year, we have seen significant activity from all the national health plans and major retailers as they build their care delivery models, create their respective zones in the care continuum, and influence reimbursement models:
- Elevance has formally stood up Carelon, combining all its care delivery capabilities in a broader strategy to offer an end-to-end care experience
- Amazon has announced its intention to acquire OneMedical, in its latest attempt to become a meaningful healthcare player
- Walgreens continues to fuel VillageMD, capping off the year with a $9B planned acquisition of Summit Health/CityMD, pulling in Cigna’s Evernorth for a large investment and alignment around the expansion of primary care
- Humana continues to align with private equity to develop and operate value-based primary care clinics under its CenterWell banner
- CVS has put $8B behind its planned Signify Health acquisition in a push to enable value-based care delivery
- Walmart continues to stand up primary care locations in the southeast, complemented by a telehealth acquisition it made in 2021 (MeMd) and a 10-year deal with UnitedHealth Group to incorporate Optum capabilities into an accelerated retail clinic operating model
We are still witnessing the early stages of this shift to evolve care delivery access models, and locations supporting lower cost of care. While this activity would have occurred regardless of the economic cycle, 2022 brought a significant acceleration in activity and this trend should continue well into 2023. CVS
remains on the hunt for more primary care capabilities, Amazon
has tremendous disruptive potential and other players including Elevance
are only now firming up their strategies and roadmaps.
Theme 4: Post-pandemic healthcare
During the early stage of the COVID-19 pandemic, the government declared a public health emergency (PHE), giving CMS temporary authority to enact several short-term policies to ensure patients were able to receive coverage and expanding ways in which providers could deliver care and receive reimbursements. Over the past two years, the PHE and related healthcare policies were extended several times over 90-day cycles. The widely held view is that the PHE is winding down and these policies will begin to terminate early in the second quarter of 2023, which will have significant implications across the healthcare sector. As we think about the coming year, we anticipate this new era of post-pandemic healthcare will trigger important industry changes and fuel market attention:
- Medicaid Redeterminations: Under the PHE, states suspended income verification for Medicaid eligibility in order to receive additional matching federal rate for payments, swelling Medicaid roles. With the end of the PHE, states will have up to 14 months to go through a redetermination process for their Medicaid populations, with the Kaiser Family Foundation estimating that somewhere between 5 and 14 million people will lose Medicaid coverage. This will have a large impact on coverage, uninsured rates, and the overall mix of payer versus commercial enrollment. There is some hope among carriers that their newly ineligible populations can be picked up on the ACA exchanges or commercial markets, but the redetermination process will undoubtedly create a small market disruption for payers and providers and increase the uninsured population in 2023 and 2024.
- Telehealth rule changes: The PHE brought significant flexibility to the way telehealth visits could take place and be reimbursed, bypassing state-by-state rules, technology requirements, and greatly expanding the types of services that were eligible for telehealth visits. Consumer acceptance of adoption of telehealth exploded during the pandemic, growing to 10% of all outpatient visits and a whopping 57% of behavioral health visits according to analysis by the Chartis Group. As the PHE ends, telehealth rules and coverage will tighten without longer term legislative fixes (some temporary measures are in place to avoid significant accessibility issues following the end of the PHE). Given the ongoing crisis, especially in mental health, anything to improve access to behavioral health services should be embraced.
- Other Medicaid, Medicare and commercial coverage flexibilities ending: The end of the PHE will signal the end of coverage for much of the COVID-19 testing, treatments and vaccines. New cost-sharing requirements for at home tests across Medicare and private insurance will likely begin, though the CARES Act did extend coverage for some COVID-19 related vaccines for in-network providers. Furthermore, hospitals will no longer receive the 20% payment increase for discharges of patients diagnosed with COVID-19. Some skilled nursing facility (SNF) prior hospitalization requirements will restart, likely causing enrollment pressures for SNFs. On the home health front, families may lose reimbursements as paid caregivers for Medicaid home and community-based services that began under the PHE. However, both CMS and states have found the family caregiver reimbursement waiver programs extremely beneficial and are working to keep program options intact. Finally, in the private insurance market, the end of the PHE changes some of the flexibility afforded to ERISA eligible COBRA and flexible spending accounts.
Even with the expiration of the PHE, the overhang of COVID-19 has significantly altered the healthcare landscape, putting tremendous stress on, and emphasizing the need for behavioral healthcare including mental and substance abuse services. With rates of depression andanxiety skyrocketing, especially among younger populations, and an accelerating opioid crisis, access to behavior health services becomes more pressing in 2023. Results from a Kaiser Faily Foundation Tracking Poll
show more than a 300% increase in adults reporting symptoms of Anxiety and/or depressive disorders between 2019 and 2021 and young adults and adolescents no doubt have been impacted to a greater extent. With additional economic pressures including a potential recession, we foresee significant investment needed to improve access and remove barriers to behavioral health services in 2023.
Beyond the more tactical impacts of the end of the PHE, we are also keeping an eye on the Biden administration’s stance on industry consolidation. Both the Department of Justice (DOJ) and the Federal Trade Commission (FTC) have taken strong anti-merger positions, not just in healthcare, but in other industries as well. Notably, we’ve all seen the attempts to halt healthcare consolidation, including the DOJ’s failed attempt to block the Optum
and Change Healthcare
merger, the FTC’s attempt to block Amazon’s OneMedical
acquisition, and the FTC’s action to block HCA
from acquiring select Stewart Health Care
facilities. Despite mixed success in blocking transactions, we do not foresee the Administration backing off its aggressive stance on horizontal integration within healthcare. With debt markets modestly improving in 2023, we expect to see an acceleration of healthcare M&A activity. However, all parties should be prepared for potentially longer review times, extra planning for second request, and additional attempts to block industry consolidation throughout 2023.
Heading into 2023, we believe these forces and themes will accelerate market activity and drive continued investment in healthcare. We remain optimistic about the coming year, the role of healthcare as an extremely resilient and large component of the U.S. economy and are encouraged by the positive signs and momentum in our own transaction activity. As we prepare to engage with the industry next week in San Francisco, we are hearing that same level of optimism from many of you – who believe 2023 is a year of growth and opportunity to continue addressing some of the long-standing industry challenges. As always, we look forward to hearing your perspectives and collaborating with you over the coming year. Here’s to a happy, healthy, and successful 2023!