The recently passed One Big Beautiful Bill Act, which makes deep cuts to the Medicaid program, also puts the food assistance that 41 million low-income Americans rely on in jeopardy. Many of the families currently getting food provided by the Supplemental Nutrition Assistance Program (SNAP) stand to lose that support.
SNAP may well disappear for some families as the federal government moves to trim it. “The cuts are massive and extremely cruel when families need more support, not less,” says Signe Anderson, senior director of nutrition advocacy, at the Tennessee Justice Center in Nashville.
Government food assistance was established during the Great Depression, but it wasn’t until 1977 that the program became more accessible when the requirement that recipients had to pay for a portion of their food stamps was ended. Throughout its history, foes of the program have tried to dismantle it and may have succeeded as a result of provisions in the bill President Trump signed on July 4.
The new legislation calls for cutting spending for food stamps by $186 billion through 2034. “Everyone on food stamps will be affected in some way, and many will lose benefits,” Anderson says. “I don’t think the Congress understands the level of necessity in the community for food, health care and mental health treatment, some for the rest of their lives.”
One major change is being made to work requirements that have historically been part of the Medicaid program, which is administered and partially funded by the states. Anderson points out that under the new arrangements, participants may find the task of enrolling and staying enrolled more onerous. “We see a lot of people cut off already because too many life circumstances make it difficult for them to meet work requirements.”
Indeed when you look at the changes to SNAP, the first word that might come to mind is ‘draconian.’
To receive benefits those new to the program, and those already on it who are between 55 and 64 and do not have dependent children or who have children 14 and older, will have to prove they work. Or they will have to volunteer at least 20 hours a week or enroll in training programs. Parents of school-aged children will now be required to work.
Some five million people, including about 800,000 children and about a half million adults who are 65 and older, could lose their food benefits.
The programs the new law targets have been a lifeline for some. Nikole Ralls, a 43-year-old woman in Nashville, who was once a drug addict but now counsels others who need help, says, “I got my life turned around because of Medicaid and SNAP.”
In a recent memo to state agencies administering the SNAP program, Agriculture Secretary Brooke Rollins said she was concerned about what was described as abuse of the waiver system by states, noting that the new approach for the SNAP program would prioritize work, education and volunteering over what the department characterized as “idleness and excessive spending.”
Anderson said, “The public doesn’t understand what hunger looks like and are misinformed about how well-run and streamlined the SNAP program is.”
“Most of the people who can, do work. We have parents working two and three jobs,” Anderson said. For families in this predicament food banks, which have become default grocery stores, may be of little help. They, too, are stretched thin. The Wall Street Journal reported food banks across the country are already straining under rising demand, and some worry there won’t be enough food to meet demand.
Medicaid serves as a vital source of health insurance coverage for Americans living in rural areas, including children, parents, seniors, individuals with disabilities, and pregnant women. Congressional lawmakers are currently considering more than $800 billion in cuts to the Medicaid program, which would reduce Medicaid funding and terminate coverage for vulnerable Americans.
The proposed changes would also result in a significant reduction in Medicaid reimbursement that could result in rural hospital closures.
The National Rural Health Association recently partnered with experts from Manatt Health to shed light on the potential impacts of those cuts on rural residents and the hospitals that care for them over the next decade.
NRHA held a press conference on June 24 that can be accessed with passcode MBTZf4$H. NRHA chief policy officer Carrie Cochran-McClain discussed the findings with Manatt Health partner and former deputy administrator at CMS Cindy Mann and the real world implications of the details of this report with three NRHA member hospital and health system leaders
Report findings provide insight into the impact on rural America at a critical moment in the Congressional debate over the future of the reconciliation package.
The report shows the significant impact from coverage losses that rural communities will face given:
Medicaid plays an outsized role in rural America, covering a larger share of children and adults in rural communities than in urban ones.
Nearly half of all children and one in five adults in small towns and rural areas rely on Medicaid or CHIP for their health insurance.
Medicaid covers nearly one-quarter of women of childbearing age and finances half of all births in these communities.
According to Manatt’s estimates, rural hospitals will lose 21 cents out of every dollar they receive in Medicaid funding due to the One Big Beautiful Bill Act. Total cuts in Medicaid reimbursement for rural hospitals—including both federal and state funds—over the ten-year period outlined in the bill would reach almost $70 billion for hospitals in rural areas.
Reductions in Medicaid funding of this magnitude would likely accelerate rural hospital closures and reduce access to care for rural residents, exacerbating economic hardship in communities where hospitals are major employers.
As a key insurer in rural communities, Medicaid provides a financial lifeline for rural health care providers — including hospitals, rural health clinics, community health centers, and nursing homes—that are already facing significant financial distress. These cuts may lead to more hospitals and other rural facility closures, and for those rural hospitals that remain open, lead to the elimination or curtailment of critical services, such as obstetrics.
“Medicaid is a substantial source of federal funds in rural communities across the country. The proposed changes to Medicaid will result in significant coverage losses, reduce access to care for rural patients, and threaten the viability of rural facilities,” said Alan Morgan, CEO of the National Rural Health Association.
“It’s very clear that Medicaid cuts will result in rural hospital closures resulting in loss of access to care for those living in rural America.”
A media briefing will be held on Tuesday, June 24, from noon to 1:00 PMEST to provide more information about the analysis. This event will feature representatives from NRHA, Manatt Health, and rural hospital leaders across the country. Questions may be submitted in advance, as well as during the press conference. To register for and join the media briefing, click on the Zoom link here.
NRHA is a non-profit membership organization that provides leadership on rural health issues with tens of thousands of members nationwide. Our membership includes nearly every component of rural America’s health care, including rural community hospitals, critical access hospitals, doctors, nurses, and patients. We work to improve rural America’s health needs through government advocacy, communications, education, and research. Learn more about the association at RuralHealth.US.
About Manatt Health
Manatt Health is a leading professional services firm specializing in health policy, health care transformation, and Medicaid redesign. Their modeling draws upon publicly available state data including Medicaid financial management report data from the Centers for Medicare and Medicaid Services, enrollment and expenditure data from the Medicaid Budget and Expenditure System, and data from the Medicaid and CHIP Payment and Access Commission. The Manatt Health Model is tailored specifically to rural health and has been reviewed in consultation with states and other key stakeholders.
Millions of people could lose coverage under potential policy changes to Medicaid under consideration by Republicans in Congress, according to a letter sent to lawmakers this week from the Congressional Budget Office.
One option, reducing the federal government’s share of costs for enrollees covered under Medicaid expansion, would reduce the federal deficit by $710 billion over the next decade. But in 2034, 5.5 million people would be removed from the safety-net program, with 2.4 million of these enrollees becoming uninsured, according to the CBO.
Another potential policy, placing a per-enrollee cap on federal spending, would remove 5.8 million people from Medicaid. Nearly 3 million of those people would lose coverage entirely. The policy would reduce the deficit by $682 billion, the analysis found.
Dive Insight:
Debates surrounding potential cuts to Medicaid — and their implications for patients and providers — have been heating up in Congress for weeks.
Last month, lawmakers approved a budget resolution that called for the House Energy and Commerce Committee, which oversees Medicare and Medicaid, to find $880 billion in savings. That budget goal is likely impossible to hit without targeting major healthcare programs under the committee’s purview, according to an earlier analysis published in March by the CBO.
The committee is expected to meet next week to mark up its portion of the reconciliation package and hash out legislation.
However, cutting Medicaid is a politically contentious move for Republican lawmakers. Some legislators have pushed back on potential cuts, and others have argued they’ll preserve Medicaid for the most vulnerable by targeting fraud, waste and abuse in the safety-net insurance program.
But Rep. Frank Pallone Jr., D-N.J., and Sen. Ron Wyden, D-Ore., who requested the latest CBO analysis, said the policies will ultimately limit benefits and result in coverage losses.
“This analysis from the non-partisan, independent CBO is straightforward: the Republican plan for health care means benefit cuts and terminated health insurance for millions of Americans who count on Medicaid,” Wyden said in a statement. “Republicans continue to use smoke and mirrors to try to trick Americans into thinking they aren’t going to hurt anybody when they proceed with this reckless plan, but fighting reality is an uphill battle.”
The letter from the CBO analyzes five potential policy options for Medicaid: setting the federal matching rate for the expansion population at the same rate as other enrollees; limiting state taxes on providers; setting federal caps on spending for the entire Medicaid population or just the expansion group; and repealing two regulations linked to eligibility and enrollment.
Most of the options reduce the funds available to states, according to the CBO. The agency expects states will replace about half of the reduced support with their own resources, and then reduce spending by cutting provider payment rates, reducing optional benefits and cutting enrollment.
For example, if Congress decides to limit provider taxes, where states levy taxes that finance a portion of their Medicaid spending, thatwould result in 8.6 million fewer people enrolled in Medicaid in 2034, including nearly 4 million becoming uninsured. The move would ultimately lessen the federal deficit by $668 billion, as the government would offer reimbursement for lower state spending, the analysis found.
Another option, placing a cap on federal spending for the expansion population, would save $225 billion — but 3.3 million people would lose Medicaid coverage. Repealing regulations that aim to reduce barriers to enrollment and simplify the renewal process would reduce the federal deficit by $162 billion over the next decade, but 2.3 million fewer people would be enrolled in Medicaid, the CBO found.
Health systems are rightly concerned about Republican plans to cut Medicaid spending, end ACA subsidies and enact site neutral payments, says consultant Michael Abrams, managing partner of Numerof, a consulting firm.
“Health systems have reason to worry,” Abrams said shortly after President Donald Trump was inaugurated on Monday.
While Trump mentioned little about healthcare in his inauguration speech, the GOP trifecta means spending cuts outlined in a one-page document released by Politico and another 50-pager could get a majority vote for passage.
Of the insurers, pharmaceutical manufacturers and health systems that Abrams consults with, healthcare systems are the ones that are most concerned, Abrams said.
At the top of the Republican list targeting $4 trillion in healthcare spending is eliminating an estimated $2.5 billion from Medicaid.
“There’s no question Republicans will find savings in Medicaid,” Abrams said.
Medicaid has doubled its enrollment in the last couple of years due to extended benefits made possible by the Affordable Care Act, despite disenrolling 25 million people during the redetermination process at the end of the public health emergency, according to Abrams.
Upward of 44 million people, or 16.4% of the non-elderly U.S. population are covered by an Affordable Care Act initiative, including a record high of 24 million people in ACA health plans and another 21.3 million in Medicaid expansion enrollment, according to a KFF report.Medicaid expansion enrollment is 41% higher than in 2020.
The enhanced subsidies that expanded eligibility for Medicaid and doubled the number of enrollees are set to expire at the end of 2025 and Republicans are likely to let that happen, Abrams said. Eliminating enhanced federal payments to states that expanded Medicaid under the ACA are estimated to cut the program by $561 billion.
If enhanced subsidies end, the Congressional Budget Office has estimated that the number of people who will become uninsured will increase by 3.8 million each year between 2026 and 2034.
The enhanced tax subsidies for the ACA are set to expire at the end of 2025. This could result in another 2.2 million people losing coverage in 2026, and 3.7 million in 2027, according to the CBO.
WHY THIS MATTERS
For hospitals, loss of health insurance coverage means an increase in sicker, uninsured patients visiting the emergency department and more uncompensated care.
“Health systems are nervous about people coming to them who are uninsured,” Abrams said. “There will be people disenrolled.”
The federal government allowed more people to be added to the Medicaid rolls during the public health emergency to help those who lost their jobs during the COVID-19 pandemic, Numerof said. Medicaid became an open-ended liability which the government wants to end now that the unemployment rate is around 4.2% and jobs are available.
An idea floating around Congress is the idea of converting Medicaid to a per capita cap and providing these funds to the states as a block grant, Abrams said. The cost of those programs would be borne 70% by the federal government and 30% by states.
This fixed amount based on a per person amount would save money over the current system of letting states report what they spent.
Another potential change under the new administration includes site neutral Medicare payments to hospitals for outpatient services.
The HFMA reported the site neutral policy as a concern in a list it published Monday of preliminary federal program cuts totaling more than $5 trillion over 10 years. The 50-page federal list is essentially a menu of options, the HFMA said, not an indication that programs will actually be targeted leading up to the March 14 deadline to pass legislation before federal funding expires.
Other financial concerns for hospitals based on that list include: the elimination of the tax exemption for nonprofit hospitals, bringing in up to $260 billion in estimated 10-year savings; and phasing out Medicare payments for bad debt, resulting in savings of up to $42 billion over a decade.
Healthcare systems are the ones most concerned over GOP spending cuts, according to Abrams. Pharmacy benefit managers and pharmaceutical manufacturers also remain on edge as to what might be coming at them next.
THE LARGER TREND
President Donald Trump mentioned little about healthcare during his inauguration speech on Monday.
Trump said the public health system does not deliver in times of disaster, referring to the hurricanes in North Carolina and other areas and to the fires in Los Angeles.
Trump also mentioned giving back pay to service members who objected to getting the COVID-19 vaccine.
He also talked about ending the chronic disease epidemic, without giving specifics.
“He didn’t really talk about healthcare even in the campaign,” Abrams said.
However, in his consulting work, Abrams said, “The common thread is the environment is changing quickly,” and that healthcare organizations need to do the same “in order to survive.”
Liberal advocacy groups are ramping up efforts to protect the Medicaid program from potential cuts by Republican lawmakers and the new Trump administration.
The Democratic group Protect Our Care launched Tuesday an eight-figure “Hands off Medicaid” ad campaign targeting key Republicans in the House and Senate, warning of health care being “ripped away” from vulnerable Americans.
The lawmakers include GOP Sens. Bill Cassidy (La.), Chuck Grassley (Iowa), Lisa Murkowski (Alaska) and Susan Collins (Maine), as well as Reps. David Schweikert (Ariz.), Mike Lawler (N.Y.) and David Valadao (Calif.).
The campaign will also include digital advertising across platforms targeting the Medicaid population in areas around nursing homes and rural hospitals, ads on streaming platforms as well as billboards and bus stop wraps.
Medicaid covers 1 in 5 Americans, and the group wants to highlight that includes “kids, moms, seniors, people of color, rural Americans, and people with disabilities.”
“The American people didn’t vote in November to have their grandparents kicked out of nursing homes or health care ripped away from kids with disabilities or expectant moms in order to give Elon Musk another tax cut,” Protect Our Care chair Leslie Dach said in a statement.
House Republicans have expressed openness to making some drastic changes in the Medicaid program to pay for extending President Trump’s signature tax cuts, including instituting work requirements and capping how much federal money is spent per person. The ideas have been conservative mainstays since they were included as part of the 2017 Obamacare repeal effort.
Separately, advocacy group Families USA led a letter with more than 425 national, state and local organizations calling on Trump to protect Medicaid.
The groups noted that if the Trump administration wants to trim health costs, “there are many well-vetted, commonsense and bipartisan proposals” that don’t involve slashing Medicaid.
“In 2017, millions upon millions of Americans rose up against proposed cuts and caps and made clear how much they valued Medicaid as a critical health and economic lifeline for themselves, their families, and their communities. The American people are watching once again, and we urge you to take this opportunity to choose a different path,” they wrote.
As Donald Trump begins his second term, America’s healthcare system is in crisis: medical costs are skyrocketing, life expectancy has stagnated, and burnout runs rampant among healthcare workers.
These problems are likely to become worse now that Trump has handed the federal budget over to Elon Musk. The world’s richest man now co-heads the Department of Government Efficiency (DOGE), a non-government entity tasked with slashing $500 billion in “wasteful” spending.
The harsh reality is that Musk’s mission can’t succeed without gutting healthcare access and coverage for millions of Americans.
Deleting dollars from American healthcare
Since Trump’s first term, the country’s economic outlook has worsened significantly. In 2016, the national debt was $19 trillion, with $430 billion allocated to annual interest payments. By 2024, the debt had nearly doubled to $36 trillion, requiring $882 billion in debt service—12% of federal spending that is legally untouchable.
Add to that another 50% of government expenditures that Trump has deemed politically off-limits: Social Security ($1.35 trillion), Medicare ($848 billion) and Defense ($1.13 trillion). That leaves just $2.6 trillion—less than 40% of the $6.75 trillion federal budget—available for cuts.
In a recent op-ed, Musk and DOGE co-chair Vivek Ramaswamy proposed eliminating expired or misused funds for programs like Public Broadcasting and Planned Parenthood, but these examples account for less than $3 billion total—not even 1% of their target.
This shortfall will require Musk to cut billions in government healthcare spending. But where will he find it?
With Medicare off limits to DOGE, the options for major reductions are extremely limited. Big-ticket healthcare items like the $300 billion in tax-deductibility for employer-sponsored health insurance and $120 billion in expired health programs for veterans will prove politically untouchable. One will raise taxes for 160 million working families and the latter will leave veterans without essential medical care.
This means DOGE will have to attack Medicaid and the ACA health exchanges. Here’s how 20 million people will likely lose coverage as a result.
1. Reduced ACA exchange funding
Since its enactment in 2010, the Affordable Care Act (ACA) has provided premium subsidies to Americans earning 100% to 400% of the federal poverty level. For lower-income families, the ACA also offers Cost Sharing Reductions, which help offset deductibles and co-payments that fund 30% of total medical costs per enrollee. Without CSRs, a family of four earning $40,000 could face deductibles as high as $5,000 before their insurance benefits apply.
If Congress allows CSR payments to expire in 2026, federal spending would decrease by approximately $35 billion annually. If that happens, the Congressional Budget Office expects 7 million individuals to drop out of the exchanges. Worse, without affordable coverage alternatives, 4 million families would lose their health insurance altogether.
2. Slashing Medicaid coverage and tightening eligibility
Medicaid currently provides healthcare for over 90 million low-income Americans, including children, seniors and individuals with disabilities. To meet DOGE’s $500 billion goal, several cost-cutting strategies appear likely:
Reversing Medicaid expansion: The ACA expanded Medicaid eligibility to those earning up to 138% of the federal poverty level, reducing the uninsured rate from 16% to 8%. Undoing this expansion would strip coverage from millions in the 40 states that adopted the program.
Imposing work requirements: Proponents argue this could encourage employment, but most Medicaid recipients already work for employers that don’t provide insurance. In reality, work requirements primarily create bureaucratic barriers that disqualify millions of eligible individuals, reducing program costs at the expense of coverage.
Switching to block grants: Unlike the current Medicaid system, which adjusts funding based on need, less-expensive block grants would provide states with fixed allocations. This will, however, force them to cut services and reduce enrollment.
Medicaid currently costs $800 billion annually, with the federal government covering 70%. Reducing enrollment by 10% (9 million people) could save over $50 billion annually, while a 20% reduction (18 million people) could save $100 billion.
Either outcome would devastate families by eliminating access to vital services including prenatal care, vaccinations, chronic disease management and nursing home care. As states are forced to absorb the financial burden, they’ll likely cut education budgets and reduce infrastructure investments.
The first 100 days
The numbers don’t lie: Musk and DOGE could slash Medicaid funding and ACA subsidies to achieve much of their $500 billion target. But the human cost of this approach would be staggering.
Fortunately, there are alternative solutions that would reduce spending without sacrificing quality. Shifting provider payments in ways that reward better outcomes rather than higher volumes, capping drug prices at levels comparable to peer nations, and leveraging generative AI to improve chronic disease management could all drive down costs while preserving access to care.
These strategies address the root causes of high medical spending, including chronic diseases that, if better managed, could prevent 30-50% of heart attacks, strokes, cancers, and kidney failures according to CDC estimates.
Yet, in their pursuit of immediate budgetary cuts, Musk and DOGE have omitted these kinds of reform options. As a result, the health of millions of Americans is at major risk.
Over the weekend, President Biden called it quits and Democrats seemingly coalesced around Vice President Harris as the Party’s candidate for the White House. While speculation about her running mate swirls, the stakes for healthcare just got higher. Here’s why:
A GOP View of U.S. Healthcare
Republicans were mute on their plans for healthcare during last week’s nominating convention in Milwaukee. The RNC healthcare platform boils down to two aims: ‘protecting Medicare’ and ‘granting states oversight of abortion services. Promises to repeal and replace the Affordable Care Act, once the staple of GOP health policy, are long-gone as polls show the majority (even in Red states (like Texas and Florida) favor keeping it. The addition of Ohio Senator JD Vance to the ticket reinforces the party’s pro-capitalism, pro-competition, pro-states’ rights pitch.
To core Trump voters and right leaning Republicans, the healthcare industry is a juggernaut that’s over-regulated, wasteful and in need of discipline. Excesses in spending for illegal immigrant medical services ($8 billion in 2023), high priced drugs, lack of price transparency, increased out-of-pocket costs and insurer red tape stoke voter resentment. Healthcare, after all, is an industry that benefits from capitalism and market forces: its abuses and weaknesses should be corrected through private-sector innovation and pro-competition, pro-consumer policies.
A Dem View of Healthcare
By contrast, healthcare is more prominent in the Democrat’s platform as the party convenes for its convention in Chicago August 19. Women’s health and access to abortion, excess profitability by “corporate” drug manufacturers, hospitals and insurers, inadequate price transparency, uneven access and household affordability will be core themes in speeches and ads, with a promise to reverse the Dobb’s ruling by the Supreme Court punctuating every voter outreach.
Healthcare, to the Democratic-leaning voters is a right, not a privilege.
Its majority think it should be universally accessible, affordable, and comprehensive akin to Medicare. They believe the status quo isn’t working: the federal government should steward something better.
Here’s what we know for sure:
Foreign policy will be a secondary focus. The campaigns will credential their teams as world-savvy diplomats who seek peace and avoid conflicts. Nationalism vs. globalism will be key differentiator for the White House aspirants but domestic policies will be more important to most voters.
Healthcare reform will be a more significant theme in Campaign 2024 in races for the White House, U.S. Senate, U.S. House of Representatives and Governors. Dissatisfaction with the status quo and disappointment with its performance will be accentuated.
The White House campaigns will be hyper-negative and disinformation used widely (especially on healthcare issues). A prosecutorial tone is certain.
Given the consequence of the SCOTUS’ Chevron ruling limiting the role and scope of agency authority (HHS, CMS, FDA, CDC, et al), campaigns will feature proposed federal & state policy changes and potential Cabinet appointments in positioning their teams. Media speculation will swirl around ideologues mentioned as appointees while outside influencers will push for fresh faces and new ideas.
Consumer prices and inflation will be hot-button issues for pocketbook voters: the health industry, especially insurers, hospitals and drug companies, will be attacked for inattention to affordability.
Substantive changes in health policies and funding will be suspended until 2025 or later. Court decisions, Executive Orders from the White House/Governors, and appointments to Cabinet and health agency roles will be the stimuli for changes. Major legislative and regulatory policy shifts will become reality in 2026 and beyond. Temporary adjustments to physician pay, ‘blame and shame’ litigation and Congressional inquiries targeting high profile bad actors, excess executive compensation et al and state level referenda or executive actions (i.e. abortion coverage, price-containment councils, CON revisions et al) will increase.
Total healthcare spending, its role in the economy and a long-term vision for the entire system will not be discussed beneath platitudes and promises. Per the Congressional Budget Office, healthcare as a share of the U.S. GDP will increase from 17.6% today to 19.7% in 2032. Spending is forecast to increase 5.6% annually—higher than wages and overall inflation. But it’s too risky for most politicians to opine beyond acknowledgment that “they feel their pain.”
My take:
Regardless of the election outcome November 5, the U.S. healthcare industry will be under intense scrutiny in 2025 and beyond. It’s unavoidable.
Discontent is palpable. No sector in U.S. healthcare can afford complacency. And every stakeholder in the system faces threats that require new solutions and fresh voices.
In the Congressional Budget Office’ latest report on the status of health insurance coverage from the 2023 National Health Interview Survey released last week, a cautiously optimistic picture of coverage is presented:
“In 2023, 25.0 million people of all ages (7.6%) were uninsured at the time of interview. This was lower than, but not significantly different from 2022, when 27.6 million people of all ages (8.4%) were uninsured. Among adults ages 18 64, 10.9% were uninsured at the time of interview, 23.0% had public coverage, and 68.1% had private health insurance coverage.
The percentage of adults ages 18-64 who were uninsured in 2023 (10.9%) was lower than the percentage who were uninsured in 2022 (12.2%).
Among children ages 0–17 years, 3.9% were uninsured, 44.2% had public coverage, and 54.0% had private health insurance coverage.
The percentage of people younger than age 65 with exchange-based coverage increased from 3.7% in 2019 to 4.8% in 2023.”
That represents the highest level of coverage in modern history. Later, it adds important context: The percentage of adults ages 18–64 who were uninsured decreased between 2019 and 2023 for all family income groups shown except for adults in families with incomes greater than 400% FPL. Notably, a period in which the Covid-19 pandemic prompted federal government’s emergency funding so households and businesses could maintain their coverage.
“Among adults with incomes below 100% FPL, the percentage who were uninsured in 2023 (20.2%) was lower than, but not significantly different from, the percentage who were uninsured in 2022 (22.7%).
Among adults with incomes 100% to less than 200% FPL, the percentage who were uninsured decreased from 22.3% in 2022 to 19.1% in 2023.
Among adults with incomes 200% to 400% FPL, the percentage who were uninsured decreased from 14.2% in 2022 to 11.5% in 2023.
No significant difference was observed in the percentage of adults with incomes above 400% FPL who were uninsured between 2022 (4.1%) and 2023 (4.3%).”
In 2023, among adults ages 18–64, the percentage who were uninsured was highest among health insurance coverage of any type was higher for those with higher household income but decreased coverage in 2023 correlated to ethnicity, non-expansion of state Medicaid programs: From 2019 to 2023.”
And decreases in the ranks of the uninsured were noted across all ethnic groups:
Among Hispanic adults, from 29.7% to 24.8%
Among Black non-Hispanic adults, from 14.7% to 10.4% in 2023
Among White non-Hispanic adults, decreased from 10.5% to 6.8%
Among Asian non-Hispanic adults, from 8.8% to 4.4% in 2023.
The New York Times noted “The drops cut significantly into gaps between ethnic groups.The uninsured rate among Black Americans, for example, was almost 8% higher than for white Americans in 2010, and was only 4%higher in 2022. The data points to the broad effects of the Affordable Care Act, the landmark law President Barack Obama signed in 2010 that created new state and federal insurance marketplaces and expanded Medicaid to millions of adults. National uninsured rates have continued to drop in recent years, hitting a record low in early 2023.”
But the report also flags a reversal of the trend: “The uninsured share of the population will rise over the course of the next decade, before settling at 8.9% in 2034, largely as a result of the end of COVID-19 pandemic–related Medicaid policies, the expiration of enhanced subsidies available through the Affordable Care Act health insurance Marketplaces, and a surge in immigration that began in 2022. The largest increase in the uninsured population will be among adults ages 19–44. Employment-based coverage will be the predominant source of health insurance, and as the population ages, Medicare enrollment will grow significantly. After greater-than-expected enrollment in 2023, Marketplace enrollment is projected to reach an all-time high of twenty-three million people in 2025.”
My take:
A close reading of this report suggests its forecast might be overly optimistic. it paints a best-case picture of health insurance coverage that under-estimates the realities of household economics and marketplace trends and over-estimates the value proposition promoted by health insurers to their customers. My conclusion is based on four trends that suggest coverage might slip more than the report suggests:
The affordability of healthcare insurance is increasingly problematic to lower- and middle-income households who face inflationary prices for housing, food, energy and transportation. The CBO report verifies that household income is key to coverage and working age populations are most-at risk of losing its protections. Subsidies to fund premiums for those eligible, employer plans that expose workers to high deductibles and increased non-covered services are likely to push fewer to enroll as premiums become unaffordable to working age adults and unattractive to their employers. As outlined in a sobering KFF analysis, half of the adult population is worried about the affordability of their healthcare—and that includes 48% who have health insurance. And wages in the working age population are not keeping pace with prices for food, shelter and energy, leaving healthcare expenses including their insurance premiums and out-of-pocket obligations at greater risk.
The value proposition for health insurance coverage is eroding among employers, consumers and lawmakers. To large employers that provide employee insurance, medical costs are forcing benefits reduction or cessation altogether. Insurance has not negated their medical costs. To small employers, it’s an expensive bet to recruit and keep their workforce. To government sponsors (i.e. Medicare, Medicaid, VHA, et al), insurance is a necessary but increasingly expensive obligation with growing dependence on private insurers to administer their programs. State and federal regulators are keen to limit public spending and address disparities in their public insurance programs. All recognize that private insurers play a necessary role in the system and all recognize that confidence in health insurance protections is suspect. Thus, increased regulation of private insurers is likely though unwelcome by its members.
Public funding for government payers will be increasingly limited increasing insurer dependence on private capital for sustainability and growth. Funding for Medicare, Medicaid, Veterans and Military Health, Public Health et al are dependent on appropriations and tax collections. All are structured to invite private insurer participation: all are seeing corporate insurers seize market share from their weaker competitors. The issues are complex and controversial as evidenced by the ongoing debates about fairness in Medicare Advantage and administration of Medicaid expansion among others. And polls indicate widespread dissatisfaction with the system and lack of confidence in its insurers, hospitals, physicians or the government to fix it.
Access to private capital for private health insurers is shrinking enabling corporate insurers to play bigger roles in financing and delivering services. Private investments in healthcare services (i.e. hospitals, physicians, clinics) has slowed and momentum has shifted from sellers to buyers seeking less risk and higher returns. Capital deployment by corporate insurers i.e. UHG, HUM et al has resulted in vertically-integrated systems of health inclusive of physician services, drug distribution, ASCs and more. And funding for AI-investments that lower their admin costs and increase their contracting leverage with providers is a strategic advantage for corporate insurer that operate nationally at scale. Unless the federal government bridles their growth (which is unlikely), corporate insurers will control national coverage while others fail.
Thus, no one knows for sure what coverage will be in 2034 as presented in the CBO report. Its analysis appropriately considers medical inflation, population growth and an incremental shift to value-based purchasing in healthcare, but it fails to accommodate highly relevant changes in the capital markets, corporate insurer shareholder interests and voter sentiment.
P.S. This is an important week for healthcare: Today marks the two-year anniversary of the Supreme Court’s Dobbs decision that overturned Roe v. Wade, ending the constitutional right to an abortion that pushed reproductive rights to states.
And Thursday in Atlanta, President Joe Biden and former President Donald Trump will make history in the first presidential debate between an incumbent and a former president.
Reproductive rights will be a prominent theme along with immigration and border security as wedge issues for voters.
The economy and inflation are the issues of most consequence to most voters, so unless the campaigns directly link healthcare spending and out of pocket costs to voter angst about their household finances, not much will be said.
Notably, half of the U.S. population have unpaid medical bills and medical debt is directly related to their financial insecurity. Worth watching.
The new year dawned on a health insurance industry beset by challenges.
Only 7% of health plan executives view 2024 positively after being hammered by the coronavirus pandemic, regulatory turbulence and rising cost pressures, according to a Deloitte survey.
Costs are spiking, and health insurers remain uncertain how the lingering effects of COVID-19 will impact care utilization. Medicaid redeterminations are rewriting the coverage landscape state by state, while Medicare Advantage — the darling of payers’ business sheets — experiences significant regulatory upheaval.
Meanwhile, 2024 is a presidential election year. That’s adding more political uncertainty into the picture as Washington hammers payers over claims denials and the business practices of pharmacy benefit units.
Here’s what experts see coming down the pike for health insurers this year.
The uninsured rate will go up
The number of Americans without insurance coverage is almost certainly going to rise this year as states overhaul their Medicaid rolls, experts say.
During the pandemic, continuous enrollment protections led a record number of people to enroll in Medicaid. But earlier this year, states resumed checking eligibility for the safety-net program. Around 14.4 million Americans have been removed from Medicaid due to the redeterminations process, many for administrative reasons like incorrect paperwork despite remaining eligible.
“We are going to see an increase in the uninsured rate for children and probably adults as well as a consequence,” said Joan Alker, executive director of the Georgetown University Center for Children and Families.
The question is how big of an increase, experts said. Redeterminations began in April, but lagging information and state differences in data reporting has made it difficult to determine where individuals are turning for coverage, and in what numbers.
Early signs suggest some people losing Medicaid have found plans in the Affordable Care Act exchanges, though it’s probably “a very small percentage,” Alker said. More than 20 million people have signed up for ACA coverage since open enrollment began in November — an all-time high, according to data released by the Biden administration in early January.
Experts say the growth is due in part to redeterminations, along with the effects of more generous federal subsidies. Those subsidies are slated to expire in 2025, meaning ACA enrollment should stay elevated until then.
But it’s unlikely everyone who loses Medicaid will find a home on the marketplaces. The cost of family coverage without an employer remains out of reach for many Americans. It’s also too early to determine how many people terminated from Medicaid have shifted into employer coverage — that data should also emerge as 2024 continues, said Matt Fiedler, a senior fellow with the Brookings Schaeffer Initiative on Health Policy.
Federal regulators have also taken a number of actions to try and curb improper procedural Medicaid losses, like cracking down on states with high levels of child disenrollments. Yet, procedural terminations are unlikely to improve significantly this year, experts said.
“We do see a very hopeful trend” in some states, like Washington and Oregon, embracing longer periods of continuous eligibility, Alker noted.
The government has ramped up ACA marketplace outreach, which — along with macro forces like a strong labor market — are positive signs that individuals no longer eligible for Medicaid may find alternative coverage, whether in the ACA exchanges or through employment.
But “it’s likely we’ll see an increase in the uninsured rate. I think the question is how much,” Fiedler said.
Increasing vigilance around costs
Healthcare costs are projected to grow much faster in 2024 than the historical average, fueled by inflation, supply chain disruption and labor pressures increasing provider wages. Those costs are burdening employers already stressed by worker mental health and deferred preventive screenings that could worsen health conditions down the line.
As a result, employers are investing heavily in mental health and substance use disorder services. Seven out of ten employers say mental healthcare access is a priority in 2024, and employers say they’ll turn to virtual care providers to address the need, according to a Business Group on Health survey.
As a result, employers are increasingly demanding integrated platforms combining different benefits, continuing a pivot away from the point solutions they were deluged with during the pandemic. Payers are racing to meet that need.
This year, UnitedHealthcare plans to integrate more than 20 standalone products into a “supported benefits platform,” said Dan Kueter, CEO of the payer’s employer and individual business, during an investor day in November.
Cigna, which focuses on employer-sponsored plans, plans to add more services to its behavioral health navigator to help employers personalize the platform for their employees this year, said CEO David Cordani during a November earnings call.
For their part, health insurers are likely to raise premiums and combat hospital reimbursement hikes in 2024 to control costs, according to credit rating agency Fitch Ratings.
However, that outlook is complicated by uncertainty around how much elevated care utilization seen in 2023 will continue. Some payers, like UnitedHealth and Humana, are forecasting high utilization, while others like CVS have said they expect it to drop.
More payers might pursue mergers and acquisitions or build out internal musculoskeletal management programs to control costs, said Prateesh Maheshwari, a managing director at venture capital firm Maverick Ventures. Hip and knee surgeries were an oft-cited driver of utilization last year.
Still, publicly traded health insurance companies could see their margins moderately decrease in 2024, Fitch said.
GLP-1 coverage will increase — slowly
Surging demand for GLP-1s means insurance coverage for the drugs is expected to increase next year, putting more stress on the nation’s pressured healthcare payment system. GLP-1s, or glucagon-like peptide-1 drugs, have historically been used to treat diabetes but have shown efficacy in weight loss.
The drugs are exceedingly expensive, butthat hasn’t stopped peoplefrom trying to get theirhands on GLP-1s — off-label or not. TD Cowen predicts GLP-1 sales could reach $102 billion by 2030, with $41 billion of that for obesity.
More private payers are considering covering the drugs next year, though the doors to coverage aren’t being thrown wide open. According to a November survey by the International Foundation of Employee Benefit Plans, while 76% of employers provide GLP-1 drug coverage for diabetes, just 27% provide coverage for weight loss.
Yet, 13% are considering adding coverage for weight loss.
As insurance coverage increases, payers will ensure only eligible patients are accessing the drugs through checks like step therapy, said Nathan Ray, head of healthcare M&A at consultancy West Monroe. As a result, access could remain restricted.
Payers will also tie coverage for GLP-1s to additional behavioral management programs. That trend has proved a gold rush for chronic condition management companies and telehealth providers, which have rushed to stand up new business lines for weight loss that include GLP-1s.
“Things like this, that include the opportunity for medication along with the accompaniment of behavioral change, is where I think the market will go in 2024,” said Heather Dlugolenski, Cigna’s U.S. commercial strategy officer.
Proponents of weight loss medication are also eyeing a potential overturn of the ban on Medicare coverage of weight loss drugs next year. A growing number of lawmakers (and drugmakers standing to profit from Medicare coverage) have come out in support of a bill introduced in 2023 to allow Medicare to cover anti-obesity drugs.
The bill is unlikely to be prioritized given Washington has a lot on its plate during the election year, but passage isn’t out of the realm of possibility, experts said.
Medicare Advantage will continue to grow under Washington’s watchful eye
In MA, the government contracts with private insurers to manage the care of Medicare seniors. MA has become increasingly popular, swelling to cover 31 million people last year — a boon for insurers offering the coverage, which can be twice as profitable for private payers than other types of plans.
As such, MA plans have been advertising heavily, trumpeting their supplemental benefits like gym memberships or subsidized groceries. Seniors find those benefits attractive, Brookings’ Fiedler said, and may not understand that MA plans may not cover as much medical care as traditional Medicare.
”My best bet would be MA enrollment in the near term continues to grow,” Fiedler said. “I don’t think we’re at the ceiling yet.”
Despite elevated costs in 2023 from seniors using more medical care, insurers generally didn’t cut back on plan benefits this year as they continue to compete for members.
Yet, the program hasn’t been without its complications. Payers cried foul last year over tweaks to MA rates, star ratings and reimbursement audits, with Humana and Elevance suing to stop the changes.
MA “should remain a key long-term growth driver for managed care, but we see a more challenging setup in 2024 as weaker funding, risk coding changes, and lower Star ratings combine to pressure margins,” J.P. Morgan analysts wrote in an outlook report published late last year.
Insurers were also plagued in 2023 by congressional hearings and lawsuits over their claims reviews processes, sparking criticism that seniors may not be receiving the care they’re due.
Scrutiny from Washington around such practices is likely to continue.
“We are seeing both in the Senate and House a lot of interest in peeling back the layers of the onion of how big health plans are operating their Medicare Advantage programs. That’s going to continue to be an issue,” said Reed Stephens, a healthcare chair at law firm Winston & Strawn who focuses on risk.
Though it’s unlikely that legislation will be passed reforming MA, Reed said. Overall, regulatory and political turbulence should subside somewhat this year.
The rate and marketing changes were “short of the last train out of the station,” said Brookings’ Fiedler. “The administration is unlikely to want a big fight with MA plans in an election year.”
The Mark Cuban effect: Payers with PBMs will launch more ‘transparent’ options
Major pharmacy benefit managers will introduce more options billed as transparent and cost-effective to retain clients after some turned to upstart competitors last year.
PBM clients are clamoring for outcomes-based pricing, with structures tying PBM compensation to measures like adherence, according to a J.P. Morgan survey from late 2023. Clients also want transparency, whether more data sharing or full administration models.
The changes aren’t revolutionary, but they hint at ongoing distrust of major PBMs from benefits teams, J.P. Morgan said.
UnitedHealth’s Optum Rx, Cigna’s Express Scripts and CVS Caremark — which together control 80% of prescriptions in the U.S. — have all recently launched new programs, partnerships or models they say are more affordable and transparent to meet the demand.
The industry is likely to see more moves along those lines in 2024, experts say — especially as Congress considers legislation to reform PBMs. The Lower Costs, More Transparency Act passed the House in December. The bill is seen as unlikely to clear the Senate, but specific measures, like forced PBM transparency, could make it into larger legislative packages.
The passing of measures around transparency could satisfy politicians’ need for a win when it comes to drug pricing without creating meaningful reform in the sector, according to Jefferies analyst Brian Tanquilut.
Yet, momentum to do something about high drug costs will certainly carry into this year. Presidential candidates on both sides of the aisle are expected to wield the issue on the campaign trail.
“The companies in those markets are going to have to stay nimble and keep on their toes,” said Winston & Strawn’s Stephens.
M&A, especially vertical integration, carries on
Companies like UnitedHealth, CVS and Humana will continue building out networks of physical care sites in 2024. New M&A guidelines from the Department of Justice and Federal Trade Commission could raise the bar for merger approvals, but the value proposition for insurers to acquire healthcare providers is too high for them to be dissuaded, experts said.
Payers will continue to pursue as many deals “as they can find willing, available targets,” said West Monroe’s Ray.
By directing members to owned locations for medical needs, health insurers can essentially pay themselves for providing a service, keeping more revenue in-house. As a result, payers — especially those with a large presence in MA, which incentivizes organizations to better manage cost — will stay on the hunt for acquisition targets.
While healthcare M&A was relatively slow in 2023, 68% of senior leaders in the sector expect deal volume to rise in 2024, according to a survey by investment bank Jefferies.
Optum — which employs or is affiliated with around one-tenth of all doctors in the U.S. — is already eyeing M&A. The health services arm of UnitedHealth is currently pursuing an acquisition of a physician-owned clinic chain in Oregon, even as it comes off a number of big provider buys in 2023, including the multi-billion-dollar acquisitions of home health providers Amedisys and LHC Group.
Cigna has also said it plans to look for smaller strategic acquisitions to grow its business, after a potential merger with rival Humana crumbled late last year.
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.
HENRY KOTULA 