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The effects of the COVID-19 pandemic on the healthcare industry have been profound, resulting in shifting profit pools, spikes in innovation, and the creation of new business models, while diversification and vertical integration are likely to accelerate in the pandemic’s wake.
These were among the conclusions of a report from McKinsey, which also found providers are diversifying into more lucrative and fast growing care-delivery services outside the hospital.
Payer and service sector profit pools are expected to grow the fastest, and overall earnings before interest, taxes, depreciation, and amortization (EBITDA) between 2012 and 2026 are expected to grow 6% to reach $31 billion in profits.
However, the report does not take into account factors including mounting economic headwinds or inflation.
An evolving payer mix, spurred by the popularity of Medicare Advantage, and shifts in sites of care, which have been driven by digitalized services like virtual care, as well as home-based services, will be key factors in the healthcare business going forward.
The report estimated annual managed Medicaid revenue growth will be 5.3% between 2021 and 2025, compared with 3.7% between 2017 and 2019, while the healthcare services and technology (HST) segment will grow at an 8.2% compound annual growth rate (CAGR) between 2021 and 2025, hitting $70 billion by the end of the period.
“Also, several provider systems have launched venture funds aimed at diversifying the core business into attractive revenue pools such as data and analytics; some have created start-up incubators to build a range of digital health products and services,” the report added.
WHY THIS MATTERS
The report arrives as the industry faces mounting expenses and eroding margins, a trend that appears to be accelerating due to elevated labor, supply and capital costs — and the hardships are likely to continue, according to Fitch Ratings.
In Los Angeles, for example, an ordinance raised the minimum wage for private healthcare workers to $25 per hour–a move that will impact roughly 20,000 healthcare workers.
THE LARGER TREND
Hospitals are expected to experience financial strain over the next decade, while telehealth is expected to resume its climb and by 2032 account for 27% of all evaluation and management visits, according to a June report from Vizient and its subsidiary Sg2.
Cleveland Clinic found its virtual second-opinion program, a joint venture between the health system and Amwell, saves the organization $65 million annually.
ON THE RECORD
” Payers, providers, HST players, and pharma services firms are facing big decisions about what kind of companies they want to be in the coming years. Even as the pandemic continues, now is the time to make strategic choices and potentially big bets. Acquisitions and new business building will increasingly be key success factors.
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