Healthcare’s next chapter: What’s ahead for the US healthcare industry

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Uncertainty has been the norm in healthcare in 2023, and that’s not likely to change in 2024. A presidential election year looms in the context of pressure on federal government finances from large budget deficits and the impact of higher interest rates on federal debt servicing costs. In addition, the healthcare industry faces uncertainty about the financing of Medicare and Medicaid; regulation, including views about horizontal and vertical integration; and overall industry economics.

In the face of this uncertainty—some might call it opacity—discerning senior management teams can act on a few trends that are clearer. Some of the trends and possible responses germane to strategy and performance of healthcare organizations in 2024 are highlighted below.

What’s ahead for healthcare players: An overview

We outlined in 2022 how the gathering storm fueled by inflation and workforce shortages would put pressure on healthcare over the next few years. Indeed, the pressure on healthcare leaders continues unabated. In response, industry players will have to consider repositioning their businesses as well as gearing up to ensure superior business performance:

  • Hospital systems face a 200-basis point gap between reimbursement rates and cost inflation, according to McKinsey analysis. The gap could require performance transformations on the part of health systems, including more outsourcing, ramping up digital and automation efforts, and business rationalization.
  • In 2024, employers are facing rising health insurance premiums well above their comfort zone of annual increases of less than 4 percent.1 As payers see continued increases in medical costs and accelerating prescription drug costs, this pressure will require health plans to renew focus on medical and administrative cost control.
  • These cost pressures offer many opportunities for tech-enabled services companies that can show customers near-term return on investment from their products. At the same time, many healthcare services and technology companies without demonstrable return will face severe downside to their businesses.
  • Higher interest rates and less liquidity in the financial markets have raised the hurdle rate for private equity (PE) and venture capital firms. In these circumstances, private investors must ensure their portfolio companies deliver bottom-line performance, produce organic growth backed by proven business models, and have the ability to make any inorganic growth accretive based on robust capabilities. Large, well-capitalized healthcare companies will find a favorable valuation environment for acquiring PE portfolio companies as well as for forming strategic partnerships with private investors.

What’s ahead for payers

Payer value creation continues to shift from administering health benefits and providing insurance to managing care and capturing delivery and pharmacy economics. Partnering with and enabling physicians, likely in risk-based arrangements, will continue to gain in importance relative to other models of utilization management.

As pressure from rising medical and prescription costs mount, scaling proven physician partnership models (for example, primary care–centered value-based care) as well as innovating new ones (specialty benefit management and specialty value-based care) will grow in importance. Enhancing health outcomes and members’ care experience, prompted by both the incentives in government programs but also rising demand from employers, will be important priorities.

Finally, a renewed focus on reducing administrative costs will be high on the agenda for payers to ensure sustainable margins, offer a better experience for members and clinicians, and to free up resources to invest in strategic capabilities.

What’s ahead for health systems

Healthcare delivery will continue its restructuring. The definition of at-scale systems has changed in the past few years; today, it takes more than $13 billion to be a top-20 system by revenue, and many have reached their current position through inorganic growth, according to McKinsey analysis. The recent wave of M&A, however, is distinct from its predecessors. It is characterized by cross-geography deals designed to create value by scaling investments in platform capabilities across digital, analytics, shared services, and workforce management.

Beyond scale, sites of care have shifted increasingly from the hospital to ambulatory, home, and virtual care. This trend was playing out before the COVID-19 pandemic and was certainly accelerated by it. But the pivot toward ambulatory sites has been slower than expected, given the impact such a transition has on health system revenue, among other structural issues. Disruptors are vying to meet consumers’ demand for convenient access, but patients can be stuck navigating a complex system of healthcare organizations when their needs become more acute.

In parallel, health systems have struggled to fill their clinical workforce needs. The nursing shortage has become more acute: more than 100,000 nurses left the profession from 2019 to 2022, and health systems could face a shortage of 200,000 to 450,000 nurses by 2025.2Assessing the lingering impact of COVID-19 on the nursing workforce,” McKinsey, May 11, 2022. Anticipated physician shortages are also an issue, though health system employment of physicians has slowed. Regulation (for example, price transparency and the 340B drug pricing program) and rising costs of capital (due to macroeconomic factors as well as ratings trajectories) will continue to create uncertainty.

While health system performance has generally improved over the past year as the industry emerges from the pandemic, a subset of players is really shining. Those that appear to be breaking away are hyperfocused on resilience, taking a multilever approach to growth while continuing to identify and take actions to ensure sustainable margins.

What’s ahead for artificial intelligence in healthcare

Generative artificial intelligence (gen AI) has created considerable excitement in the industry. Gen AI could be catalytic in accelerating the application of digital and automation in healthcare, thereby offering some answers to the twin challenges of affordability and workforce availability. For example, adopting currently available technology (including but not limited to automation, AI, and gen AI) could allow payers to reduce administrative costs by 13 to 25 percent, reduce medical costs by 5 to 11 percent, and increase revenue by 3 to 12 percent.

However, healthcare has lagged behind other industries in adoption of AI. For several reasons, the industry has had a hard time adopting the technology. For example, AI requires time-consuming and often manual preparation of clean and structured data; well-planned, narrow use cases (such as predicting a specific event or outcome); modern infrastructure; and hard-to-hire talent (such as data scientists and data engineers).

Given the need for empathetic and intelligent interactions in a service industry such as healthcare, the recognition, comprehension, and content creation capabilities of gen AI represent a major opportunity. It is particularly appealing in its simplicity: gen AI thrives on unstructured data, which is plentiful in healthcare; it is pretrained; and it is broadly understood by people across the organization. The potential use cases for gen AI cross every domain and function. Gen AI use cases, in addition to existing analytics use cases, could help address real burdens, including reducing preparation time and improving quality of clinical documentation, modernizing outdated or legacy applications, and personalizing patient and member outreach at scale.

Unlocking this value will be a leadership challenge. Senior healthcare executives will need to educate their boards, leadership teams, and employees; attract talent; drive adoption; and pursue change management initiatives such as workflow shifts. Scaling pilots to production-scale solutions with concurrent process changes will be important differentiators in 2024.

What’s ahead in prescription drugs

GLP-1 drugs hold the promise of treating type 2 diabetes (in 11 percent of the US population; 38 percent of the population has prediabetes3) and obesity (42 percent of adults4), potentially helping to avoid many other ailments, such as heart and chronic kidney disease. The population of patients meeting clinical eligibility criteria for GLP-1s is one of the largest of any new drug class in the past 20 to 30 years.

Although there is much to be excited about, experience shows that taking advantage of medical advances is often elusive in healthcare. GLP-1s must be taken consistently to maintain weight loss; however, initial studies indicate persistency and adherence to therapy is poor (32 percent of members remain persistent at one year and 27 percent during the second year5).

Nonetheless, the shift in care and financing models that accompany GLP-1 drugs are likely to be material. The growth of the GLP-1 market has amplified the conversation around preventive care and demonstrated the impact of media awareness and consumer-driven demand in treatment decisions. Its expansion has also fueled the rise of telehealth providers, broadening access points for consumers.

The growth of the GLP-1 market presents cost challenges in the near term because benefits will accrue over time. The annual wholesale acquisition cost per patient ranges from $12,000 to $16,000. The high cost of the therapy raises complex coverage decisions for payers and plan sponsors, made even harder by the potential spending waste from therapy discontinuation.

GLP-1 drugs are not the only broad population drugs emerging or in the late-stage pipeline; others include treatments for Alzheimer’s and non-alcoholic fatty liver disease. New drugs have the potential to not only improve patients’ health but also heighten the need for better therapy and cost management. The resulting business model changes across the healthcare value chain are likely to be meaningful.

We hear from many healthcare leaders that this is an unnerving time given the relentless pressure and uncertain outlook they face. They also tell us that this is an exciting time that presents opportunities for innovation to improve members’ and patients’ health and lives, to reimagine current organizations, and build new capabilities and businesses. We would suggest healthcare leaders address known trends and avoid trying to predict future trends, given the considerable uncertainty ahead. Building resilient and agile organizations capable of rapidly adapting to new challenges as they emerge will be important to succeed in this environment.

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