Healthcare’s Post-Growth Reset

5 minute
Stethoscope and doctor

While leaders are “keeping the lights on,” where will growth come from?

For much of the last decade, rapid revenue growth was the predominant business imperative in the healthcare industry and the broader U.S. economy. Technology and retail-focused companies from Amazon to Oscar Health to CVS/Aetna, just to name a few, have taken ambitious steps into healthcare with offerings for everything from primary care to ambulatory clinics to new, consumer-focused insurance plans.

At the same time, many health systems scaled up their services and market presence through partnerships and mergers with other systems and health plans, or through the development of their own digital-first services or insurance products. In just the last three years, the proportion of hospital and health system M&A transactions where the smaller party’s annual revenue exceeded $1 billion grew from 3.3% in 2019 to 15.4% in 2022, according to Kaufman Hall’s 2022 M&A Year in Review.

But as the operational and inflationary aftershocks of the COVID-19 pandemic and its aftermath continue to reverberate, a very different healthcare macroeconomic climate, where capital is no longer readily available and inexpensive, is taking shape.

Many of the healthcare disruptors of the last decade are coming of age with fewer options for the next investor or round of funding, while confronting serious questions about their long-term profitability. And many major technology companies have recently announced significant layoffs, including Amazon, Microsoft, Zoom, Google, and Spotify, as well as smaller, healthcare-focused entities.

Health systems have also been by hit hard by economic headwinds. According to Kaufman Hall’s National Hospital Flash Report, 2022 was the worst financial year for U.S. hospitals since the start of the pandemic. Access to capital is more limited, workforce shortages abound, and many health systems are facing diminishing returns to footprint expansion in existing markets, leading to fewer opportunities for organic revenue growth.

Retooling Your Organization for 2023 and Beyond

To thrive in the post-growth era, healthcare organizations must determine whether they have the right assets, capabilities, and deployable capital to achieve their visions and serve their communities. After a period of growth and aggregation, this includes a careful evaluation of business models and care models, particularly in the ambulatory and in-home settings.

In some cases, organizations will need to determine which services and capabilities they must own, and which services can be acquired through partnerships or outsourcing. For the many newly merged entities, these steps are foundational to realizing the promise of a major partnership. This reset also means that, for organizations that have maintained strength, there may be opportunities to access valuable tools, capabilities, and human capital—or even entire companies—that have been negatively affected by current market conditions.

Strategies for the Post-Growth Reset

Not-for-profit and other mission-driven healthcare organizations currently have a series of opportunities for advancing their mission within the current market climate. Potential strategies include:

Adopting a “share of requirements” mindset. In recent years, many organizations have aimed to acquire covered lives in their markets, through the expansion of their existing footprints and partnerships with insurers and employers. While some have experienced modest success, these efforts can be costly, and health systems are having limited success driving covered lives growth due to the need to compete on price. This muted success in sustainably acquiring covered lives begs the question: what are healthcare organizations selling, and why should consumers and purchasers feel compelled to buy it?

Key Takeaway: Organizations that first focus on meeting a wider range of their consumers’ “share of requirements”—or their healthcare needs—through services and other features and building strong consumer relationships will be better positioned to convert those relationships into arrangements for managing their total cost of care. To successfully build and sustain consumer relationships, healthcare organizations must be able to measure whether consumers are truly choosing their services, staying loyal to their brand, and accessing more services over a longer timeframe.

Super-regional scale and revisiting “total cost of care” partnerships. In 2022, a series of merger announcements—including Intermountain Healthcare and SCL Health, Advocate Aurora Health and Atrium Health, and Fairview Health Services and Sanford Health—signaled the emergence of cross-market mergers as a significant growth strategy.

As it relates to vertical integration, while Amazon, Walgreens and CVS Health have gone on a primary care acquisition spree, progress on collaborations between payers and health systems slowed in 2022. Inflationary pressure has created a tense negotiation environment and many payers have taken a tougher stance in recent months with health systems. However, a shared interest in finally addressing the total cost of care is not going away. As just one example, recent research finds that cancer care is now the top driver of healthcare costs for large companies, heightening the imperative for lowering the cost of oncology care.

Key Takeaway: In 2023, existing super-regional systems may seek additional partners, and new cross-market systems are likely to emerge. At the same time, health systems must take a new, more strategic approach to payer and employer engagement. Maximizing value for patients and unlocking the benefits of payer/provider collaboration may require health systems working with a more limited set of partners that can account for larger shares of each other’s customers. All of this will require careful evaluation of existing relationships and the potential impact of disruption to patients and to financial outcomes.

Effectively interacting with private equity and other non-traditional partners. In recent years, health system interactions with private equity have become increasingly commonplace, including

partnerships with private equity-backed companies, joint investments with private equity firms, investments in private funds as limited partners, and efforts to create captive venture funds.

These relationships, which are likely to continue for the foreseeable future, can benefit providers and patients through greater access to resources and novel capabilities, but it creates a new challenge for not-for profit health systems to manage their community-based missions while navigating the objectives of private equity investors.

Key Takeaway: Generational challenges like the current healthcare workforce shortages require outside thinking and out-of-the-box solutions. Not-for-profit organizations will need to access smart opportunities for business model and care model optimization (and growth) while balancing mission requirements. Private equity and venture capital investors are now a fundamental part of the healthcare ecosystem, so partnerships and transactions with investor-backed companies will inevitably be part of the consideration set. Understanding how the objectives and business models of these companies will serve health systems well in 2023 and beyond.

Kaufman Hall Senior Vice Presidents Scott Christensen and Max Timm contributed to this article.

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