When we last looked at the trajectory of the US healthcare industry in our July 2022 article, “The future of US healthcare: What’s next for the industry post-COVID-19?,” we had emerging concerns about what persistent inflation could cause.1 It is now clear that inflation is not transitory and that the economic outlook has meaningfully darkened.2 These economic troubles, combined with a healthcare-worker shortage and endemic COVID-19, are clouding the industry outlook. Below, we update how these changes could affect payers, providers, healthcare services and technology (HST), and pharmacy services.
Commercial and Medicare Advantage segments, physician offices, HST and specialty pharmacy segments may grow most quickly.
Going forward, a number of factors will likely influence shifts in profit pools. These include:
- Change in payer mix: A substantial shift toward Medicare will continue, led by growth in the over-65 population of 3 percent per year projected over the next five years and continued popularity of Medicare Advantage among seniors, as reflected in the latest Centers for Medicare & Medicaid Services (CMS) enrollment data.3 However, based on our models, Medicaid enrollment could decline by about ten million lives over five years given recent legislation that will allow states to begin eligibility redeterminations, which were paused during the federal public health emergency that was declared at the start of the COVID-19 pandemic.4 Commercial segment margins in 2021 were about 200 basis points lower than 2019 levels, resulting from the return of deferred care. We expect profit pools in this segment to rebound and grow at a 15 percent CAGR as EBITDA margins will likely return to historical averages by 2026. The growth will be partially offset by enrollment changes in the segment, prompted by a shift from fully-insured to self-insured businesses that could accelerate as employers facing recessionary pressure seek to cut costs.
- Endemic COVID-19: Since the publication of our last article, COVID-19 has moved more and more toward an endemic stage. Based on our estimates, endemic COVID-19 could result in healthcare costs of about $200 billion annually in the United States. The majority of these costs would be related to the prevention and treatment of COVID-19 cases as well as long COVID.5
The industry faces difficult conditions in 2023, primarily because of continuing high inflation rates and labor shortages.
Government segments expected to be 50 percent larger than commercial segments by 2026.
Based on our revised estimates, the mix of payer profit pools will shift further toward the government segment. Overall, the estimated profit pools for this segment are expected to be about 50 percent greater than the commercial segment by 2026 ($33 billion compared with $21 billion) as Medicare Advantage penetration is expected to reach 52 percent in 2026. Profit pools for the commercial segment declined from $18 billion in 2019 to $11 billion in 2021 as margins compressed with the return of deferred care. We expect the commercial segment’s EBITDA margins to return to historical levels by 2026, and profit pools to reach $21 billion, growing at a 15 percent CAGR from 2021 to 2026. Within this segment, a shift from fully-insured to self-insured business will likely accelerate as recessionary pressures prompt employers to cut costs. The fully-insured group enrollment could drop by 150 basis points annually from 2021 to 2026, and self-insured increase by 100 basis points annually during the same period.
We expect increased labor costs and administrative expenses to reduce payer EBITDA by about 60 basis points in 2022 and 2023 combined. In addition, providers will push for reimbursement rate increases (up to about 350 to 400 basis-point incremental rate increases from 2023 to 2026 for the commercial segment and about 200 to 250 basis points for the government segment), according to McKinsey analysis and interviews with external experts.6
Cost increases may limit provider segment growth.
Providers pursuing cost-saving measures may face three scenarios for EBITDA recovery.
HST profit pools are likely to continue to grow.
Pharmacy services will continue to grow.
We expect accelerated improvement efforts to help the industry address these challenges in 2024 and beyond.
The US healthcare industry faces demanding conditions in 2023, including recessionary pressure, continuing high inflation rates, labor shortages, and endemic COVID-19. But players are not standing still. We expect accelerated improvement efforts to help the industry address these challenges in 2024 and beyond, leading to an eventual return to historical average profit margins.