Volume 16
After a difficult 2022, healthcare professionals’ anxiety is high. Will the financial struggles, contract disputes, rising prices and wages, and staffing shortages we saw last year continue – and will they be made worse by a recession? The answer is almost certainly yes, but we’re also likely to see continued investment in specific sectors of the health industry and federal and state agencies may make headway on health equity.
Fortunately, there are opportunities amid the challenges.
The ABIG Health Team was in San Francisco speaking with investors and insiders this past week during the J.P. Morgan Healthcare Conference.
Below are our top 10 takeaways that should inform investment strategy.
#1: Optimization - Hospitals are Struggling
After one of the worst years in decades, more than 50% of hospitals are ending the year in the red. And while there does seem to be some improvement in premium labor costs and supply chain/inflation woes, the trend isn’t profound enough to make a huge change.
So What’s Next: Optimization. CommonSpirit and Ascension Health have made big commitments and should make significant improvements in their operational efficiencies. From labor costs and clinical and systems patient flow operations to identifying procurement savings, hospitals recognize revenues are likely to remain a challenge – so they’ve got to do business differently.
#2: Consolidations Will Continue
In the last four years, hospital consolidation activity has slowly dropped. Nevertheless, mergers are likely to pick up again since health systems have experienced a significant increase in labor and supply costs and COVID funds are running dry. Those costs and the implications to the balance sheet may be mitigated if the costs are shared over bigger systems.
So What’s Next: Health systems and new acquisitions can enhance hospitals’ status with bond market investors and increase their ability to negotiate with commercial insurers to reduce losses from Medicare reimbursement decreases. Smaller organizations may try to use their resources more efficiently by collaborating with bigger systems that have more access to money.
#3: The Healthcare Investment Market Remains Murky and Mixed
The healthcare investment outlook for 2023 is somewhat mixed and murky. It is evident that inflation is not a short-term problem (although it is improving), and the economic landscape has significantly deteriorated. (Today, many economists believe the global economy will almost certainly head into recession in 2023. How long and how deep, if at all, is still in question.) Add to that a chronic lack of healthcare professionals and ongoing COVID-19 problems. These issues are likely to cause a shift and influence payers, providers, healthcare systems, health tech, and pharmacy services. With North America and European banks tightening credit to combat inflation, deals may become more selective, slow, and challenging.
So What’s Next: Despite these challenges, some healthcare investors are prepared to move forward (although their focus may shift). In fact, according to the 2023 KPMG Healthcare and Life Sciences Investment Outlook, 60% of respondents plan to boost their merger and acquisition activities in the coming year.
#4: CVS is making moves into Primary Care
CVS, the largest significant pharmacy retail chain in the United States, is reportedly considering buying Oak Street Health, a publicly traded Medicare-focused primary care chain that owns 173 centers. The price tag? $10 billion, but the purchase would solidify CVS’ plan to have a hand in each service along a patient’s journey. Oak Street Health provides instant walk-in primary care services through its MinuteClinic branch, which has more than 1,100 retail clinics. In recent years, CVS has been purchasing various healthcare assets outside its fundamental pharmacy service, including Signify, a home care company, for $8 billion. It also has a pharmacy benefit manager (CVS Caremark) and an insurance arm (Aetna). The potential acquisition made big news at the JPM Conference.
So What’s Next: I was asked about the news from Healthcare Business International, an international healthcare investment journal. Here’s what I said:
“If CVS does go ahead with the acquisition, it would move the company forward in its ambition to control more of the patient journey, which could help to reduce costs for the insurer (Aetna) and potentially for Medicare and for patients, as it could allow scaling of CVS’ and Oak Streets’ value-based care models… But it doesn’t come without risks. We’ve seen there can be risks for patients and providers when these kinds of mergers take place. They need to make sure they continue to provide good access, good quality of care and a good work environment for health professionals.”
#5: Health Tech Investments Continue - But Caution
Despite the economy suffering and the market declining, investors still anticipate that digital health investments will total between $15 billion and $25 billion by 2023, which is similar to what was invested in 2020. Other indicators suggest investment could be more robust. A survey from GSR Ventures that questioned 50 digital health venture capitalists found these professionals expect to invest the same amount of money in health tech this year as was done in 2021.
So What’s Next: I would proceed with caution, however. A number of digital health companies are entering the market. And while most purport convenience and increased access for patients, few will truly transform healthcare. The result could mean greater fragmentation and increased costs, not less. If digital health systems are not integrated and function seamlessly with other, larger existing ones, patients and providers could get confused.
#6: Healthcare Should Occur Outside of the Hospital
The demand for healthcare services is likely to continue to grow in the post-COVID era. With more people requiring access to healthcare services, investments in outpatient physician practices will be a good option for investors. Additionally, the costs associated with outpatient physician practices are usually lower than that of inpatient facilities, making them a more attractive option for investors.
So What’s Next: With the pandemic highlighting the importance of preventive healthcare services, those services can help to reduce the overall costs associated with treating illnesses and diseases, making them a worthwhile investment. Investments in outpatient physician practices also will benefit from the excitement around value-based care. With the cost of healthcare rising, investments in outpatient physician practices will be seen as a viable option for providing high-quality care at a lower cost.
#7: Speaking of Value-Based Care
Investments in value-based care practices are increasingly attractive to healthcare providers and payers. These investments can help improve patient outcomes, reduce costs, and create a more efficient healthcare system. By investing in technologies, team-based care, and population health management, providers can ensure they are delivering high-value, cost-effective care that meets the needs of their patients.
So What’s Next: Value-based care also encourages providers to invest in technology that can help improve the quality and efficiency of care delivery. These investments include electronic health records (EHRs), telehealth, and data analytics, all of which can help providers make better-informed decisions about patient care. By investing in these technologies, providers can improve the quality of care and reduce costs by streamlining processes and eliminating unnecessary services.
#8: Health Equity
We can also expect to see greater investment in research and development in the field of health equity in 2023. Research and development in this field can help to identify the most effective strategies for addressing health disparities. Research and development also can provide evidence-based guidance on how to allocate resources and implement health equity initiatives in a cost-effective manner.
So What’s Next: Overall, it is clear health equity initiatives will continue to see growing investment in 2023. This trend is due to the growing understanding that equity is a major factor in determining health outcomes, as well as the recognition of the importance of addressing the social determinants of health. Investors looking to do good with their dollars should focus here.
What Was NOT a Big Deal:
#1: COVID
Despite growing concerns by public health officials about a new Omicron subvariant (XBB155), healthcare investors have shifted their focus to business post-pandemic. While many investors recognize COVID19 will be a factor in healthcare (staffing, supply chains, etc.), they are less likely to believe it is the factor driving or thwarting business. (As an aside, this was the first time the conference was in person since the start of the pandemic.)
So What’s Next: There are two things at play with this change in focus. One, the pandemic and our response to it, has shifted. With vaccines, prior immunity, and medications available to treat the infection, individuals are less psychologically and physically affected by the virus. There’s a second thing at play, however, and that’s the psychology of avoidance. People are tired of dealing with and talking about COVID. That said, COVID has caused immense harm to numerous individuals, healthcare professionals, and businesses, large and small. The pandemic has also created opportunity (i.e. digital health). As we learn about each variant/subvariant and determine if the latest vaccine (or prior immunity) protects us from the virus, we will see how business adapts.
#2: The New Congress
With the Republicans controlling the House of Representatives and the Democrats leading the Senate, the chance for substantial lawmaking is small. The thin majorities in both chambers signify that even basic legislative proceedings will be a struggle. Nevertheless, as I have said before, the Biden administration can still pursue regulatory activity to push ahead with their health-related objectives, and it still has yet to execute the Inflation Reduction Act and the infrastructure law.
So What’s Next: When Congress is divided, the emphasis tends to move from creating laws to regulation and oversight. We expect to see an increase in congressional inquiries into the private sector, particularly the healthcare field. Stay tuned for very public investigations into certain industry practices.
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