Jersey City, N.J.-based CarePoint Health and Hudson Regional Hospital in Secaucus, N.J., have signed a letter of intent to combine under a new management company, Hudson Health System, which will incorporate the acute care facilities of both organizations.
Hudson Health System would be a four-hospital system that includes both nonprofit and for-profit hospitals in an innovative new model and continue to be in-network with all major payers.
The transaction is expected to strengthen CarePoint’s financial position and improve patient care and outcomes across the hospitals, according to John Rimmer, CarePoint’s chief medical officer, said in a Jan. 12 news release.
“Hudson County is the most diverse and dynamic community in New Jersey, and its residents deserve nothing less than exceptional care, affordable access, the most advanced specialties and technology, and the highest caliber physicians to serve patients’ needs, especially the underserved communities that rely on our facilities,” said CarePoint President and CEO Achintya Moulick, MD, who will be president and CEO of Hudson Health System. “With adequate state support, I believe we can build a hospital system that will deliver on its core mission.”
The letter of intent is the precursor to a new organizational structure and operating plan that will require approval from the New Jersey State Department of Health. Hudson Health System would be a four-hospital system that includes Hudson Regional, Bayonne Medical Center, Hoboken University Medical Center and Christ Hospital in Jersey City.
“This new system expands our mutual impact far beyond and far sooner than what we could ever have achieved separately,” Hudson Regional CEO Nizar Kifaieh, MD, said. “The possibilities are enormous and will energize the entire medical community to deliver that much more to the patients.”
More details about Hudson Health System are expected to be announced in the coming days.
There is no one-size-fits-all when it comes to managing teams, and managers may take different approaches based on team size, organization size, organizational needs and other factors. However, one approach has risen to the surface recently: “quiet management.”
Career coach Adam Broda posted about the topic on LinkedIn last year. He said quiet managers stop checking employee start and stop times, let people choose to work where they want, encourage guilt-free time off, remove unnecessary meetings and distractions, listen to team feedback about how the manager manages, and give workers what they need to be successful, then step away and trust them to deliver.
“Quiet managers operate with a high level of trust in their employers and don’t micromanage,” Mr. Broda wrote. “This way, the job becomes more of a support role and gives managers the time to get out in front and lead by example instead of leading by structure and administration.”
To gain insight into what quiet management may look like in healthcare, Becker’s discussed the topic with three leaders: Kevin Mahoney, CEO of the University of Pennsylvania Health System, part of Philadelphia-based Penn Medicine, which also includes the Perelman School of Medicine; Karen Frenier, BSN, RN, senior vice president of human resources and chief nurse executive at Orlando (Fla.) Health; and Mitch Cloward, president of Salt Lake City-based Intermountain Health’s Desert Region.
Mr. Mahoney leads health system operations, spanning six hospitals, 11 multispecialty centers and hundreds of outpatient facilities in Pennsylvania, Delaware and New Jersey. He said he demonstrates quiet management by emphasizing the “why” behind Penn Medicine’s business, rather than the “how.”
“At Penn Medicine, we believe we were founded to create and disseminate knowledge, and that’s what we try to do,” he said.
The organization has found success with this approach; the breakthrough messenger ribonucleic acid technology that enabled the COVID-19 vaccines from Moderna and Pfizer-BioNTech came from the organization.
“So when you’re doing your job, you’re not just doing your revenue cycle job,” Mr. Mahoney said. “You’re also creating a hospital margin that allows us to fund research.”
He said he also works to be visible and assumes positive intent.
“I think everybody comes to work to do their very best,” Mr. Mahoney added. “We give them guidelines, we set priorities, but we need to let them get the job done.”
Ms. Frenier described her management style as authentic and transparent. This means clearly and frequently communicating with team members.
“With quiet management, I think, communicate once and get out of the way,” she said. “And my conflict a little bit [with that] is you can do quiet management and have visibility at the same time. And I think that is so important. What is important for us, Orlando Health, our culture, my leadership style is very clear expectations, what our goals are, what our priorities are.”
Ms. Frenier also subscribes to the lean management philosophy of leaders “going to the gemba” — a Japanese term for “actual place” — a principle that involves direct observation to improve work processes.
“It doesn’t make any sense for me to say, ‘Here’s how to fix the problem.’ The problem needs to be answered by the team members who do the work,” she said. “Our role [as managers] is to remove obstacles, move things along sometimes. So to me, that’s part of quiet management. However, my conflict is that there’s nothing quiet about it.”
The approach is one Mr. Cloward said is woven throughout the healthcare workforce.
“Quiet leadership and quiet managers are frequently observed in healthcare,” he said. “This may be associated with our primary purpose and our mission of selflessly devoting ourselves to caring for our patients and the communities we serve. I also believe that most caregivers and leaders that choose a career in healthcare do so because they want to help others.”
Refining meeting strategy
Meetings are an important part of a manager’s responsibilities, but too many meetings could leave some employees overwhelmed and less clear on the task at hand. A 2022 report from Otter.ai and the University of North Carolina at Charlotte found nearly one-third of meetings are unnecessary and that organizations waste millions of dollars on them.
From Mr. Mahoney’s perspective, the productivity of meetings can get lost in the virtual world and in Zoom meetings, so his focus is on getting back to productive meetings.
“You wouldn’t go into a conference room and put a brown bag on your head,” he said. “But people get on a Zoom meeting and they’ll turn the camera off, and we’re losing the engagement.”
To maximize engagement, his overall philosophy is that daily huddles on units are better than meetings to solve a problem, interact and move forward with a solution. He said video and online tools have also been helpful to disseminate his words to 50,000 employees.
Ms. Frenier also expressed support for huddles over formal sit-down meetings. She said 259 nurse leaders across the company attended a huddle Jan. 11.
“That excites me,” she said. “That number is as good as when we started it a little over a year ago. And, when I start with my updates, if Hospital Consumer Assessment of Healthcare Providers and Systems, our customer experience and emergency department throughput is our top work, then I’m very consistent in giving us an update on how that work is. [Managers must] be clear with your expectations. You can’t talk about a new one every day. But you’ve got a follow-up [via huddles]. The best way for us to connect is to be visible, develop relationships.”
To help with that connection, Orlando Health recently rolled out new behavioral expectations for workers across all teams. The expectations center around communication, connection, commitment and curiosity.
“We have written out what that means,” Ms. Frenier said. “The next step for that is to make our coaching plans easier for leaders to have that conversation [about those expectations].”
Facing conflict head-on
No matter the leadership style, managers at one time or another likely will have to handle challenging conversations or conflicts within their team. Mr. Mahoney’s approach: “Handle them straightforward first thing in the morning, get it resolved, get it behind us, and then don’t let it linger and carry forward.”
He said it is especially important to address the obstacle or problem rather than the individual.
“I do that with a lot of data, not just Penn data, but industry trends,” Mr. Mahoney said. “We all think we’re an island unto ourselves. [But no matter the organization], the issues are very similar.
“We can’t control our external environment; we can just control our response to it. So a lot of the confrontational meetings that we have are because we have to change the way we’re doing business. Not because we’re doing it wrong, but because of the macroeconomic headwinds that we’re facing.”
Approaching challenging situations as a quiet manager often reflects the style of “servant leadership,” Mr. Cloward said.
“I strive to understand what they hope to accomplish in their current job and what they hope to achieve over time with career goals and aspirations,” Mr. Cloward said. “I dedicate time to helping them remove barriers to reduce frustration and increase satisfaction as we serve. I establish clear direction so that expectations are fully understood and in doing so, I strive to inspire rather than force, coerce or incite fear.”
Being effective — quietly
There are other practices or habits that quiet managers use outside of handling challenging conversations or conflicts within their team. Mr. Mahoney, for example, stands at a connecting hallway between two buildings that is frequented by workers and answers people’s questions in between shifts.
He is also in favor of asking workers more open-ended questions such as, “What can I do to make your job easier?” and “What obstacles did you face today that I could work to eliminate?” instead of a question like, “How many bills did we collect today?”
“Because, again, people know their jobs,” Mr. Mahoney said. “They don’t need me to do their jobs.”
Ms. Frenier agreed.
“It is our role [as managers] to allow the team members to be the best they can be and get out of the way,” she said. “… Supporting them with the right tools and documentation that’s not so burdensome, and, if there’s technology that helps us do our job better, that’s the work we should be doing.”
However, being effective as a quiet manager does not begin only once someone is hired and part of a team. Rather, it can start as early as the hiring process, Mr. Cloward said, and approaching the process from this angle can improve workplace culture.
“Quiet leaders are leaders who have been disciplined in the hiring process,” he said. “They hire the very best caregivers who not only have technical/clinical skills, but also human skills — caregivers who are altruistic, who devote themselves to serving our patients and our communities.”
Jefferson Einstein Hospital in Philadelphia is implementing a two-year phased closure of its pediatric residency program, according to a Jan. 11 statement provided to Becker’s.
Residents currently enrolled will be able to complete the three-year program, but there will be no new class this year.
Jefferson Health, the hospital’s operator, said the decision was made in response to “the changing medical needs of our communities.”
“We consistently examine all opportunities to continually improve health care delivery in the communities we serve,” the system said in the statement. “We remain committed to caring for the outpatient pediatric patients in our community and will continue to provide inpatient services in the perinatal newborn unit and neonatal intensive care unit at Jefferson Einstein Hospital.”
Jefferson Einstein Hospital came under Jefferson’s umbrella after the health system merged with Einstein Healthcare Network in October 2021.
Earlier this week, Upland, Pa.-based Crozer-Chester Medical Center’s surgical residency program’s lost its accreditation, with the program needing to close by Jan. 12. Accreditation for the program — which had 15 filled resident positions — was withdrawn “under special circumstances,” according to a note on the ACGME’s website.
By the end of this week, we’ll know a lot more about the economic trajectory for U.S. healthcare in 2024: it may cause indigestion.
Digesting deal announcements and industry prognostics from last week’s 42nd JPM conference in San Francisco. Notably, with the exceptions of promising conditions for weight loss drugs, artificial intelligence and biotech IPOs, the outlook is cautionary for providers and inviting for insurers and retail health. Expanded conflicts in Ukraine and Gaza loom as threats. The U.S. trade relationship with China and its growing tension with Taiwan poses an immediate threat to the U.S. healthcare supply chain for raw materials in drugs, OTC products, disposables. U.S. public opinion about its institutions is arguably shaped in part in social media: TikTok is owned by Chinese internet tech company ByteDance and operates in 150 countries. The 16 not for profit health system presentations at JPM sounded a chorus in unison: ‘our core business—hospital care– is not sustainable. We need deals with private capital to stay afloat.’ By contrast, national insurers and retailers sang a different tune: ‘the market is receptive to our products and services that are cheaper, better and more easily accessed through digital platforms. The status quo is outdated’.
Digesting results from today’s Iowa GOP Caucus which serves as a gatekeeper for Presidential candidate wannabes. In the run-up to Campaign 2024, polls show voters interested in abortion rights and affordability. But specific health system reforms have not surfaced to date in this election cycle and understandably: per the November 2023 Keckley Poll, 76% of U.S. adults agree that “Most politicians avoid healthcare issues because solutions are complicated and they fear losing votes” vs. 6% who disagree. Thus, the Iowa results might narrow the President contestant pool, but it will do little to clarify U.S. health policies in 2025 and beyond.
Digesting takeaways from the World Economic Forum (WEF) in Davos. The annual confab draws world leaders and big-name consultancies and bankers who want to rub elbows with them. It’s notable that the WEF pre-conference Global Risk Survey indicated growing concern about a looming “global catastrophe” and its agenda includes sessions on women’s health, misinformation and artificial intelligence—all central to healthcare’s future. The world is small: 8 billion inhabitants in 195 countries. There’s growing global attention to healthcare and recognition that the integration of social services (nutrition, housing, transportation, et al) and elimination of structural barriers that limit access are necessary to the effectiveness of their systems. The U.S. lacks both though it’s the world’s most expensive system. Thus, U.S.-based solutions to enhance clinical efficacy for specialty care are accessible to global markets at prices significantly lower than what U.S. taxpayers pay because their government’s refuse to pay U.S. rates.
Digesting where Congress lands this week on the fiscal 2024 budget. A deal was reached tentatively yesterday on a short-term funding bill that would avert a partial government shutdown this Friday. The $1.6 trillion continuing resolution funds the government through March 1 and March 8 and includes $886B for defense and $704B for other total discretionary programs. While payments for social security and Medicare are not impacted, most other federal health programs are impacted and therefore caught in the Congressional crossfire between budget hawks wary of the ballooning federal deficit ($34 trillion) and progressives who think the federal government spends too much on the ‘have’s’ and not enough, including health and social services, on its ‘have not’s.’ And this deal is TENTATIVE!
My take:
The cumulative effect of these events in economic indigestion for the entire U.S. economy and especially for those of us who work in its healthcare industry. So, for the balance of 2024, the realities for U.S. healthcare are these:
Public support for the health system is eroding. Trust and confidence in the U.S. health system is low. No sector in U.S. healthcare is immune though some (community hospitals, public health programs, independent physicians) are more favorably viewed than others. Confidence in government agencies (CDC, FDA, CMS) is fractured due to misinformation and disinformation. ‘Not-for-profit’ designation is a meaningful distinction to some but secondary to characteristics more readily understood and valued.
Federal policies toward healthcare are increasingly antagonistic. They’re popular and in most cases, bipartisan. Federal policies that expand price transparency (drugs, hospitals, health insurance), constrain on consolidation (horizontal) and private equity investing, expose/reduce conflicts of interest, address workforce resilience (compensation, work-rules) and protect consumers will be prominent. Beyond these, court actions and budgetary negotiations will define/refine federal health policies. Notably, the rumored DOJ antitrust action against Apple will be a closely watched barometer as will the government’s attention toward Microsoft given its leading role in ChatGPT and AI platform Copilot et al.
The big players enjoy advantages over smaller players. It’s a buyer’s market for them. The corporatization of U.S. healthcare has rewarded big operators in each sector and punished smaller, independent operators. More regulation, higher operating costs, escalating administrative complexity and shifting demand require capital that’s increasingly unaffordable/inaccessible to less credit-worthy players. In 2024, in every sector, bigger fish will eat the smaller as readily-accessible private capital is deployed to welcoming sellers. But mechanisms whereby ‘independents’ are protected and growing disparity in how care is financed and delivered will be a prominent concern to policymakers.
Regrettably, an off-the-shelf Pepto-Bismol is not available to the U.S. system. It is complex, fragmented, inequitable and expensive, but also profitable for many who benefit from the status quo.
So, the conclusion that can be deduced from the four events this week is this: economic indigestion in U.S. healthcare will persist this year and beyond because there is no political will nor industry appetite to fix it. Darwinism aka ‘survival of the fittest’ is its destiny unless….???
Patient experience measures declined nationwide in 2022, though some hospitals are showing early signs of improvement.
Below are 72 hospital patient experience benchmarks based on national HCAHPS measures from CMS. Data was collected from hospitals in calendar year 2022 and published on CMS’ Provider Data Catalog Nov. 8. Learn more about the methodology here.
Communication with hospital staff
Nurses always communicated well: 79%
Nurses sometimes or never communicated well: 5%
Nurses usually communicated well: 16%
Nurses always treated them with courtesy and respect: 85%
Nurses sometimes or never treated them with courtesy and respect: 3%
Nurses usually treated them with courtesy and respect: 12%
Nurses always listened carefully: 76%
Nurses sometimes or never listened carefully: 5%
Nurses usually listened carefully: 19%
Nurses always explained things so they could understand: 75%
Nurses sometimes or never explained things so they could understand: 6%
Nurses usually explained things so they could understand: 19%
Physicians always communicated well: 79%
Physicians sometimes or never communicated well: 5%
Physicians usually communicated well: 16%
Physicians always treated them with courtesy and respect: 85%
Physicians sometimes or never treated them with courtesy and respect: 4%
Physicians usually treated them with courtesy and respect: 11%
Physicians always listened carefully: 78%
Physicians sometimes or never listened carefully: 6%
Physicians usually listened carefully: 16%
Physicians always explained things so they could understand: 74%
Physicians sometimes or never explained things so they could understand: 7%
Physicians usually explained things so they could understand: 19%
Responsiveness of hospital staff
Patients always received help as soon as they wanted: 65%
Patients sometimes or never received help as soon as they wanted: 11%
Patients usually received help as soon as they wanted: 24%
Patients always received call button help as soon as they wanted: 64%
Patients sometimes or never received call button help as soon as they wanted: 10%
Patients usually received call button help as soon as they wanted: 26%
Patients always received bathroom help as soon as they wanted: 66%
Patients sometimes or never received bathroom help as soon as they wanted: 11%
Patients usually received bathroom help as soon as they wanted: 23%
Communication about medicines
Staff always explained medicines before giving it to them: 62%
Staff sometimes or never explained: 20%
Staff usually explained: 18%
Staff always explained what new medications were for: 75%
Staff sometimes or never explained new medications: 10%
Staff usually explained new medications: 15%
Staff always explained possible side effects: 48%
Staff sometimes or never explained possible side effects: 31%
Staff usually explained possible side effects: 21%
Discharge information
Yes, staff did give patients information about what to do during their recovery at home: 86%
No, staff did not give patients information: 14%
No, staff did not give patients information about help after discharge: 16%
Yes, staff did give patients information about help after discharge: 84%
No, staff did not give patients information about possible symptoms: 13%
Yes, staff did give patients information about possible symptoms: 87%
Patients who agree they understood their care when they left the hospital: 43%
Patients who disagree or strongly disagree they understood their care when they left the hospital: 6%
Patients who strongly agree they understood their care when they left the hospital: 51%
Cleanliness of hospital environment
Room was always clean: 72%
Room was sometimes or never clean: 10%
Room was usually clean: 18%
Quietness of hospital environment
Always quiet at night: 62%
Sometimes or never quiet at night: 10%
Usually quiet at night: 28%
Transition of care
Patients who agree that staff took their preferences into account: 47%
Patients who disagree or strongly disagree that staff took their preferences into account: 8%
Patients who strongly agree that staff took their preferences into account: 45%
Patients who agree they understood their responsibilities when they left the hospital: 43%
Patients who disagree or strongly disagree they understood their responsibilities when they left the hospital: 6%
Patients who strongly agree they understood their responsibilities when they left the hospital: 51%
Patients who agree they understood their medications when they left the hospital: 37%
Patients who disagree or strongly disagree they understood their medications when they left the hospital: 5%
Patients who strongly agree they understood their medications when they left the hospital: 58%
Overall hospital rating
Patients who gave a rating of six or lower: 9%
Patients who gave a rating of seven or eight : 21%
Patients who gave a rating of nine or 10: 70%
Patients probably would not or definitely would not recommend the hospital: 6%
Yes, patients would definitely recommend the hospital: 69%
Yes, patients would probably recommend the hospital: 25%
A new perspective on how technology, transformation efforts, and other changes have affected payers, health systems, healthcare services and technology, and pharmacy services.
The acute strain from labor shortages, inflation, and endemic COVID-19 on the healthcare industry’s financial health in 2022 is easing. Much of the improvement is the result of transformation efforts undertaken over the last year or two by healthcare delivery players, with healthcare payers acting more recently. Even so, health-system margins are lagging behind their financial performance relative to prepandemic levels. Skilled nursing and long-term-care profit pools continue to weaken. Eligibility redeterminations in a strong employment economy have hurt payers’ financial performance in the Medicaid segment. But Medicare Advantage and individual segment economics have held up well for payers.
As we look to 2027, the growth of the managed care duals population (individuals who qualify for both Medicaid and Medicare) presents one of the most substantial opportunities for payers. On the healthcare delivery side, financial performance will continue to rebound as transformation efforts, M&A, and revenue diversification bear fruit. Powered by adoption of technology, healthcare services and technology (HST) businesses, particularly those that offer measurable near-term improvements for their customers, will continue to grow, as will pharmacy services players, especially those with a focus on specialty pharmacy.
Below, we provide a perspective on how these changes have affected payers, health systems, healthcare services and technology, and pharmacy services, and what to expect in 2024 and beyond.
The fastest growth in healthcare may occur in several segments
We estimate that healthcare profit pools will grow at a 7 percent CAGR, from $583 billion in 2022 to $819 billion in 2027. Profit pools continued under pressure in 2023 due to high inflation rates and labor shortages; however, we expect a recovery beginning in 2024, spurred by margin and cost optimization and reimbursement-rate increases.
Several segments can expect higher growth in profit pools:
Within payer, Medicare Advantage, spurred by the rapid increase in the duals population; the group business, due to recovery of margins post-COVID-19 pandemic; and individual
Within health systems, outpatient care settings such as physician offices and ambulatory surgery centers, driven by site-of-care shifts
Within HST, the software and platforms businesses (for example, patient engagement and clinical decision support)
Within pharmacy services, with specialty pharmacy continuing to experience rapid growth
On the other hand, some segments will continue to see slow growth, including general acute care and post-acute care within health systems, and Medicaid within payers (Exhibit 1).
Several factors will likely influence shifts in profit pools. Two of these are:
Change in payer mix. Enrollment in Medicare Advantage, and particularly the duals population, will continue to grow. Medicare Advantage enrollment has grown historically by 9 percent annually from 2019 to 2022; however, we estimate the growth rate will reduce to 5 percent annually from 2022 to 2027, in line with the latest Centers for Medicare & Medicaid Services (CMS) enrollment data.1 Finally, the duals population enrolled in managed care is estimated to grow at more than a 9 percent CAGR from 2022 through 2027.
We also estimate commercial segment profit pools to rebound as EBITDA margins likely return to historical averages by 2027. Growth is likely to 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 seek to cut costs if the economy slows. Individual segment profit pools are estimated to expand at a 27 percent CAGR from 2022 to 2027 as enrollment rises, propelled by enhanced subsidies, Medicaid redeterminations, and other potential favorable factors (for example, employer conversions through the Individual Coverage Health Reimbursement Arrangement offered by the Affordable Care Act); EBITDA margins are estimated to improve from 2 percent in 2022 to 5 to 7 percent in 2027. On the other hand, Medicaid enrollment could decline by about ten million lives over the next five years based on our estimates, given recent legislation allowing states to begin eligibility redeterminations (which were paused during the federal public health emergency declared at the start of the COVID-19 pandemic2).
Accelerating value-based care (VBC). Based on our estimates, 90 million lives will be in VBC models by 2027, from 43 million in 2022. This expansion will be fueled by an increase in commercial VBC adoption, greater penetration of Medicare Advantage, and the Medicare Shared Savings Program (MSSP) model in Medicare fee-for-service. Also, substantial growth is expected in the specialty VBC model, where penetration in areas like orthopedics and nephrology could more than double in the next five years.
VBC models are undergoing changes as CMS updates its risk adjustment methodology and as models continue to expand beyond primary care to other specialties (for example, nephrology, oncology, and orthopedics). We expect established models that offer improvements in cost and quality to continue to thrive. The transformation of VBC business models in response to pressures from the current changes could likely deliver outsized improvement in cost and quality outcomes. The penetration of VBC business models is likely to lead to shifts in health delivery profit pools, from acute-care settings to other sites of care such as ambulatory surgical centers, physician offices, and home settings.
Payers: Government segments are expected to be 65 percent larger than commercial segments by 2027
In 2022, overall payer profit pools were $60 billion. Looking ahead, we estimate EBITDA to grow to $78 billion by 2027, a 5 percent CAGR, as the market recovers and approaches historical trends. Drivers are likely to be margin recovery of the commercial segment, inflation-driven incremental premium rate rises, and increased participation in managed care by the duals population. This is likely to be partially offset by margin compression in Medicare Advantage due to regulatory pressures (for example, risk adjustment, decline in the Stars bonus, and technical updates) and membership decline in Medicaid resulting from the expiration of the public health emergency.
We estimate increased labor costs and administrative expenses to reduce payer EBITDA by about 60 basis points in 2023. In addition, health systems are likely to push for reimbursement rate increases (up to about 350 to 400 basis-point incremental rate increases from 2023 to 2027 for the commercial segment and about 200 to 250 basis points for the government segment), according to McKinsey analysis and interviews with external experts.3
Our estimates also suggest that the mix of payer profit pools is likely to shift further toward the government segment (Exhibit 2). Overall, the profit pools for this segment are estimated to be about 65 percent greater than the commercial segment by 2027 ($36 billion compared with $21 billion). This shift would be a result of increasing Medicare Advantage penetration, estimated to reach 52 percent in 2027, and likely continued growth in the duals segment, expanding EBITDA from $7 billion in 2022 to $12 billion in 2027.
Profit pools for the commercial segment declined from $18 billion in 2019 to $15 billion in 2022. We now estimate the commercial segment’s EBITDA margins to regain historical levels by 2027, and profit pools to reach $21 billion, growing at a 7 percent CAGR from 2022 to 2027. Within this segment, a shift from fully insured to self-insured businesses could accelerate in the event of an economic slowdown, which prompts employers to pay greater attention to costs. The fully insured group enrollment could drop from 50 million in 2022 to 46 million in 2027, while the self-insured segment could increase from 108 million to 113 million during the same period.
Health systems: Transformation efforts help accelerate EBITDA recovery
In 2023, health-system profit pools continued to face substantial pressure due to inflation and labor shortages. Estimated growth was less than 5 percent from 2022 to 2023, remaining below prepandemic levels. Health systems have undertaken major transformation and cost containment efforts, particularly within the labor force, helping EBITDA margins recover by up to 100 basis points; some of this recovery was also volume-driven.
Looking ahead, we estimate an 11 percent CAGR from 2023 to 2027, or total EBITDA of $366 billion by 2027 (Exhibit 3). This reflects a rebound from below the long-term historical average in 2023, spurred by transformation efforts and potentially higher reimbursement rates. We anticipate that health systems will likely seek reimbursement increases in the high single digits or higher upon contract renewals (or more than 300 basis points above previous levels) in response to cost inflation in recent years.
Measures to tackle rising costs include improving labor productivity and the application of technological innovation across both administration and care delivery workflows (for example, further process standardization and outsourcing, increased use of digital care, and early adoption of AI within administrative workflows such as revenue cycle management). Despite these measures, 2027 industry EBITDA margins are estimated to be 50 to 100 basis points lower than in 2019, unless there is material acceleration in performance transformation efforts.
There are some meaningful exceptions to this overall outlook for health systems. Although post-acute-care profit pools could be severely affected by labor shortages (particularly nurses), other sites of care might grow (for example, non-acute and outpatient sites such as physician offices and ambulatory surgery centers). We expect accelerated adoption of VBC to drive growth.
HST profit pools will grow in technology-based segments
HST is estimated to be the fastest-growing sector in healthcare. In 2021, we estimated HST profit pools to be $51 billion. In 2022, according to our estimates, the HST profit pool shrank to $49 billion, reflecting a contracting market, wage inflation pressure, and the drag of fixed-technology investment that had not yet fulfilled its potential. Looking ahead, we estimate a 12 percent CAGR in 2022–27 due to the long-term underlying growth trend and rebound from the pandemic-related decline (Exhibit 4). With the continuing technology adoption in healthcare, the greatest acceleration is likely to happen in software and platforms as well as data and analytics, with 15 percent and 22 percent CAGRs, respectively.
In 2023, we observed an initial recovery in the HST market, supported by lower HST wage pressure and continued adoption of technology by payers and health systems searching for ways to become more efficient (for example, through automation and outsourcing).
Three factors account for the anticipated recovery and growth in HST.First, we expect continued demand from payers and health systems searching to improve efficiency, address labor challenges, and implement new technologies (for example, generative AI). Second, payers and health systems are likely to accept vendor price increases for solutions delivering measurable improvements. Third, we expect HST companies to make operational changes that will improve HST efficiency through better technology deployment and automation across services.
Pharmacy services will continue to grow
The pharmacy market has undergone major changes in recent years, including the impact of the COVID-19 pandemic, the establishment of partnerships across the value chain, and an evolving regulatory environment. Total pharmacy dispensing revenue continues to increase, growing by 9 percent to $550 billion in 2022,4 with projections of a 5 percent CAGR, reaching $700 billion in 2027.5Specialty pharmacy is one of the fastest growing subsegments within pharmacy services and accounts for 40 percent of prescription revenue6; this subsegment is expected to reach nearly 50 percent of prescription revenue in 2027 (Exhibit 5). We attribute its 8 percent CAGR in revenue growth to increases in utilization and pricing as well as the continued expansion of pipeline therapies (for example, cell and gene therapies and oncology and rare disease therapies) and expect that the revenue growth will be partially offset by reimbursement pressures, specialty generics, and increased adoption of biosimilars. Specialty pharmacy dispensers are also facing an evolving landscape with increased manufacturer contract pharmacy pressures related to the 340B Drug Pricing Program. With restrictions related to size and location of contract pharmacies that covered entities can use, the specialty pharmacy subsegment has seen accelerated investment in hospital-owned pharmacies.
Retail and mail pharmacies continue to face margin pressure and a contraction of profit pools due to reimbursement pressure, labor shortages, inflation, and a plateauing of generic dispensing rates.7Many chains have recently announced8 efforts to rationalize store footprints while continuing to augment additional services, including the provision of healthcare services.
Over the past year, there has also been increased attention to broad-population drugs such as GLP-1s (indicated for diabetes and obesity). The number of patients meeting clinical eligibility criteria for these drugs is among the largest of any new drug class in the past 20 to 30 years. The increased focus on these drugs has amplified conversations about care and coverage decisions, including considerations around demonstrated adherence to therapy, utilization management measures, and prescriber access points (for example, digital and telehealth services). As we look ahead, patient affordability, cost containment, and predictability of spending will likely remain key themes in the sector.The Inflation Reduction Act is poised to change the Medicare prescription Part D benefit, with a focus on reducing beneficiary out-of-pocket spending, negotiating prices for select drugs, and incentivizing better management of high-cost drugs. These changes, coupled with increased attention to broad-population drugs and the potential of high-cost therapies (such as cell and gene therapies), have set the stage for a shift in care and financing models.
The US healthcare industry faced demanding conditions in 2023, including continuing high inflation rates, labor shortages, and endemic COVID-19. However, the industry has adapted. We expect accelerated improvement efforts to help the industry address its challenges in 2024 and beyond, leading to an eventual return to historical-average profit margins.
HCA Healthcare is the single hospital operator that Bloomberg identifies as one of “50 Companies to Watch in 2024.”
“From Alphabet and BYD to Eli Lilly and Vivendi, keep an eye on these global stocks this year,” the outlet proposes for the 50 companies out of the 2,000 firms assessed. Bloomberg analysts highlighted the companies as those warranting a closer look, based on “contrarian views and upcoming catalysts for change such as new leadership, asset sales or acquisitions, and plans for new products and services.”
With 182 hospitals and more than 37,000 hospital beds, Bloomberg analyst Glen Losev said HCA “faces cost and revenue challenges that point to a reduction in its operating margin. Wages are increasing, especially for nurses, as are non-labor costs because of general inflation. And fewer physician visits indicate softening demand for care in areas such as elective surgeries.”
HCA is tied to an estimated 5% increase to its revenue in 2024 with a market cap of $72 billion.
The company posted $47.66 billion in revenue for the first nine months of 2023 compared to $44.73 billion in the same period of 2022. Its fourth quarter earnings are due later this month.
Other healthcare companies recognized by Bloomberg as worth watching are Novo Nordisk, BeiGene, Boston Scientific and Eli Lilly. Weight loss drug possibilities drive potential for Novo Nordisk and Eli Lilly, with estimated revenue increases of 22% and 16%, respectively.
HENRY KOTULA 