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The evolution of healthcare-provider profit pools

Why nonhospital-provider segments are primed for growth—and why that matters.

Nonhospital-provider segments—everything from diagnostics and pre-, non-, and postacute services to physicians and other healthcare professionals—could account for almost 55 percent of projected profit pools by 2021, according to McKinsey research. That is the big picture.

Look more closely and important details become apparent. One is that, as the healthcare environment changes, different segments are likely to deliver sharply different profit outcomes (Exhibit 1). Three trends in particular—in utilization, reimbursement, and efficiency—will shape the future.

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Utilization

Because of shifts in consumer preferences, technology, and the payer imperative to redirect care to lower-cost settings, utilization rates for different healthcare-provider segments are changing. For example, utilization of urgent care centers (UCCs) increased dramatically between 2015 and 2017 among both the commercial and the Medicare fee-for-service (FFS) populations (Exhibit 2).

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Payers have encouraged this trend through the design of insurance-product benefits—namely, by reducing out-of-pocket costs for care in UCCs relative to emergency departments (EDs) and by offering incentive payments to physicians to navigate patients to lower-cost sites for care. However, UCC utilization may be close to saturation: operating the centers around the clock is challenging and expensive.

Use of ambulatory surgical centers (ASCs) has also become more common among both commercial and Medicare FFS members, and developments in clinical practice and healthcare technology mean that more growth is likely. For example, the Centers for Medicare & Medicaid Services (CMS) recently proposed adding total-knee replacements to the ASC-covered-procedure list. 1 If this change receives approval, ASCs could pick up significant inpatient volume. 2

As the US population ages and payers seek to keep the elderly out of hospitals and skilled-nursing facilities if lower-cost settings can provide comparable or better care, 3 home-healthcare providers are well positioned to benefit. Consider the demographics: from now to 2025, the population aged 65 and older will grow more than four times faster than the total population will. 4

These older patients, particularly those with chronic conditions, will heighten the demand for high-touch, home-based care. This could lead to more and deeper partnerships between payers and home-based primary-care providers—particularly those that can manage the higher-risk and the very-frail populations. Growth is also likely in outpatient-related sites that offer options like 24/7 or weekend care (Exhibit 3).

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Reimbursement

Some healthcare-provider segments will benefit more than others from changes in reimbursement policies—and some will be hurt. In 2019, CMS awarded ASCs a 2.1 percent rate increase. 5 The CMS final rule also included several provisions to level the playing field by raising ASCs to the higher rate used for hospitals’ outpatient departments and ensuring better reimbursement for devices. The Ambulatory Surgery Center Association estimates that the latter means that ASCs can now afford to provide 142 additional procedures to Medicare beneficiaries.

On the other hand, reimbursement rates and other trends could hurt freestanding EDs (FSEDs). The recent Medicare Payment Advisory Commission (MedPAC) recommendation to cut payments by 30 percent to off-campus FSEDs located within six miles of a hospital illustrates the commission’s belief that some nonrural FSEDs are overpaid. 6 Similarly, a number of private health-insurance payers are warning enrollees of the high costs of FSEDs and recommending alternative settings, such as UCCs. 7 If CMS adopts MedPAC’s recommendations to reduce reimbursement, private payers may follow suit; that would make FSEDs’ traditional customer base of affluent, privately insured patients less profitable.

Efficiency

Many nonhospital-provider segments, including ASCs and UCCs, are realizing the benefits of scale. Moreover, new kinds of entrants, such as private-equity companies, emphasize greater efficiencies in operations. The result: larger profit pools.

For example, data suggest that the average time for an ambulatory-surgical visit for a Medicare patient in an ASC was 25 percent to 40 percent shorter than for those in a hospital’s outpatient department 8 and that procedures in ASCs took 17 percent less time. 9 The operating- and fixed-cost advantages of ASCs will likely grow as their economies of scale, utilization rates, and operations improve. In fact, the growth of multisite ASC operators has outpaced overall ASC growth every year since 2009, driven by investment from hospital systems, such as Tenet Healthcare and HCA Management, and large healthcare-services operators, such as Surgery Partners.

There has also been significant growth in physician-related consolidation. Historically, acquirers purchased physician practices for two reasons: to take advantage of fragmented markets and to reap the benefits of improving operations. At first, specialties with relatively high proportions of commercial and self-pay patients, such as dentistry and dermatology, attracted the most interest. Later, acquirers focused on hospital-based specialties, such as anesthesiology and emergency medicine, that had significant revenue potential but also required substantial capital investment. Examples of such deals include Blackstone’s purchase of TeamHealth and Kohlberg Kravis Roberts’s acquisition of Envision Healthcare.

We believe that ASCs, UCCs, and physician practices will consolidate further, with hospital systems, private-equity companies, and strategic investors all playing roles. We also anticipate that nonacute-care providers will offer a wider array of services to capture revenue that has historically gone to hospitals. For example, UCCs may begin to offer stand-alone diagnostic services. If these operators can better manage labor costs, which often make up the largest single expense, their efficiency advantages will grow.


What does all this mean for the healthcare sector?

First, it is important to note that even if nonhospital segments are growing faster than other segments are, it does not necessarily mean bad news for other providers. In fact, this trend could provide a way for hospitals to expand their care-delivery networks through partnerships or acquisitions.

Second, nonhospital providers are, in many ways, at the cutting edge of US healthcare. They are innovating in how they care for patients and how they use data and technology.

The pressure to deliver higher-quality results at lower cost and greater convenience is going to continue. The evolution of this segment may offer useful guidance on how to deliver results.

About the author(s)

Gunjan Khanna is a senior partner in McKinsey’s Pittsburgh office. Rob May is a specialist at the Waltham Client Capability Hub. Neha Patel is a partner in the New York office. Nithya Vinjamoori is a consultant in the San Francisco office.

The authors would like to thank Ankit Jain for his contributions to this article.