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2024 Outlook: Healthcare's big squeeze and the way out
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Overview
Tune in as PwC specialists discuss the 2024 outlook for healthcare and how the sector can grow and innovate amid economic challenges and uncertainty. Topics include:
- Major forces impacting the sector: economic pressure, rising costs, labor shortage, and expensive drugs
- Ways to overcome compression and deliver value: industry-wide transformation, tech enabled business model reinvention, transactions and deals to drive transformation, and building trust
Topics: Health services, sustainability, value-based care, insurers, pharmaceuticals, innovation, transformation, technology, business model reinvention, trust, providers, patients, economics, AI, healthcare, consumer, payers, M&A, deals, strategy, health systems, Generative AI, investments, health industries.
Episode transcript
Find episode transcript below.
00:00:00:00 Welcome to Next in Health podcast. I'm Jenny Colapietro, PwC’s Vice Chair for health industries, working across pharmaceuticals, medtech, payers and providers.
00:00:11:08 And today we're joined with Thom Bales, the leader of our Health Services Practice, and Laura Robinette, our Health Industries trust leader. Tom and Laura, welcome.
LAURA ROBINETTE:
00:00:25:01 Jenny. Thanks for having me today. It's great to be with you all.
THOM BALES:
00:00:28:27 Thank you, Jenny, and great to be here.
JENNY COLAPIETRO:
00:00:31:09 Today we're going to discuss the 2024 outlook for health services and how the sector can grow and innovate amid economic challenges and uncertainty. Thom, to start us off. Can you briefly recap the major forces that the sector is facing this year?
THOM BALES:
00:00:46:01 Great. So to start off with, we consider 2024 to be a year of sustained economic compression, what we're calling the big squeeze. And what we mean by that, it's a year where for two years in a row now, we've seen an increase in the medical cost inflation that the US health economy is experiencing
00:01:06:04 after several years of decrease, and it's a year when we're seeing the CMS start to put a shot over the bow for the re-energization of our value- based care, and in essence, that they are going to start to decrease the increases in reimbursement coming from CMS for Medicare and Medicaid going forward.
00:01:28:22 And at the same time, we continue to experience the high costs of inflation. We continue to experience a tight labor market and the rising cost of pharmaceuticals. So for many of our health services organizations, health systems and health plans, some of whom are at razor thin margins
00:01:47:02 if they are profitable and many of whom are trying to find their way back into profitability, these factors feel relentless, and this reality requires a new response. Something that goes beyond the 12 months of year-to-year planning and starts to think about how do we get to a different kind of a growth, a different kind of an innovation for health services?
00:02:08:10 And for 2024, it will likely be a year that they realize that the current plan, their current trajectory, is not sufficient to take them out of this. We believe that there is a way out of compression for health systems and for health plans, that that path is through growth and innovation and is paved by industry wide transformation, tech-enabled business model reinvention.
00:02:28:07 Thinking about how do you use transactions and deals to drive transformation your business and lead to new kinds of capabilities, a different kind of a market presence. And lastly, and probably most importantly, the concept of lasting trust. And how do you build that across the ecosystem and across your stakeholders, members, providers, consumers, employers, etc.?
JENNY COLAPIETRO:
00:02:48:12 So Tom, let's unpack that a bit. Let's talk a little bit more about what industry-wide transformation looks like.
THOM BALES:
00:02:55:05 The industry wide transformation is predicated on the thought that the sector overall really needs to envision a world of better quality and economics, where real change can overcome this concept of this compression that we're feeling of the economics of the industry and set a different course, a different trajectory to a different kind of an outcome that delivers better value.
00:03:16:16 But the big question is, is how do we get there? We see the largest health organizations, some of the emerging mega players, is exhibiting greater market influence and the ability to rewire parts of health care differently than what we've had in the past. They are equipped with technology, infrastructure that can harness the power of AI.
00:03:35:07 They have the ability to attract and or create also leading talent, positioned to re-engineer whole processes for them around value and shift care to settings and labor pools best suited to support that care. In addition, we see some ecosystems that are forming that address value, trust and equity differently.
00:03:54:05 Different kinds of health systems and health plans coming together in markets to solve for value-based care, and or the influx of private equity and their role in trying to drive some innovation. We see some recent mergers between retail and digital organizations demonstrating the possibility of creating a different kind of an experience,
00:04:15:04 a different kind of a delivery model in health care to support consumer expectations. And we also see providers pursuing lower cost, higher quality alternatives to traditional services, seeking to become preferred partners for payers and for patients with a significant shift to virtual care.
00:04:33:06 And while there's some pullback in some areas of virtual care, we see the integration of it into a whole care offering different than what we saw even five years ago. We know that consumers expect companies to build capabilities that support their convenience, their convenience for the time of the day, for their family, for their personal situation, and to advocate for their needs.
00:04:55:10 And this is against the backdrop, and one of the most important sectors within healthcare today is the 65 million-member Medicare market, which for many reasons, we might consider to be the most competitive and consumer-centric market, where we're looking at zero premium health plans.
00:05:11:10 We're looking at innovation and product. We're looking at different kinds of service, but that starts to set the stage for how do we drive a different kind of a health services environment. And lastly, we also need to think about that in this current environment,
00:05:24:09 when we think about whole system transformation, what we're really talking about is getting to the right balance of quality and value. And there's tension within our system today. There's tension around pre-authorizations. There's tension around the use of evidence-based medicine.
00:05:40:06 There's tension around really getting the right level of service the right side of care to meet the needs of our members where they need it most in the best way possible. Transformation is solving for that tension that exists in our system today, so that we do it in the highest value, highest quality way possible.
JENNY COLAPIETRO:
00:06:03:06 And Laura, how do mergers and acquisitions fit into the industry transformation equation as Thom just outlined it?
LAURA ROBINETTE:
00:06:10:02 Well, you're right, Jenny. Thom did touch on it, but deals activity is really playing a big part in transforming the sector despite the challenges which we'll go into in just a second. We really think our health services deals outlook is pretty optimistic.
00:06:27:00 Corporate entities are really recognizing the importance of business and portfolio transformation to achieve their growth and profit expectations. And M&A really is seen as a way of leading these changes.
00:06:39:09 We've seen many non-traditional, cross-sector partnerships popping up as a strategic focus for the health systems, and strategic assessments are really driving more divestitures and a bit of realignment in the sector.
00:06:57.0 Thom touched on it, but Medicare Advantage is really playing a big part. We're seeing big health care companies looking into M&A to fuel their Medicare Advantage programs. However, the environment is super challenging. It's changing. And the average time to get a deal closed has significantly increased.
00:07:17:09 As the Department of Justice is very focused on antitrust and ensuring consumers have a choice in healthcare. We've observed the FTC focus on physician and specialist roll-ups, but we've also heard concerns arising out of the PE firms and other asset managers where they're prioritizing profits over patient care and affordability of health care.
00:07:42:28 The DOJ is also spending a lot of time on competition, behavioral health, and advertisements and is likely to continue to address fraud allegations through its abilities under the False Claims Act. In 2023 that HHS appointed its first chief competition officer to oversee consolidation in the sector.
00:08:05:03 And both the FTC and the Department of Justice have finalized new merger guidelines late last year, which we think will continue to slow the pace of healthcare mergers.
JENNY COLAPIETRO:
00:08:18:02 Thanks, Laura. Definitely sounds like some interesting options for M&A and help in that transformation equation. Thom, you've said that some organizations risk falling behind if they don't do enough and quickly enough to change. Can you share a little bit more about what this means?
THOM BALES:
00:08:35:17 So I initially talked about whole system transformation. And now I want to shift to talk about business model reinvention for the organization, the health system, the health plan, right, that participates in the overall health services market.
00:08:48:05 And when we talk about business model reinvention, we have to set the context to think about roughly 50% of the CEOs that we surveyed in PwC’s 27th annual global CEOs survey basically said that they don't believe that their business is viable within a decade without significant transformation, that what they're doing today is not sufficient.
00:09:11:29 And what's interesting about that is that number continues to grow for several years in a row now, and they are feeling the pressures from forces of transformation or innovation, whether that be AI or that be this economic compression that I'm talking about here.
00:09:29:02 And they're saying that they know that they need to do more to change faster. And so for us, we think about business model reinvention as things like reshaping your value chain, shifting, possibly disintermediating whole parts of the value chain. And we think about that and some of the legacy, significant industry disruptions that have happened in media over the years.
00:09:53:05 Many of you can think about what those look like, consumer products. We think about businesses asking themselves the question around what business are they in, and are there service plays or product and service convergent plays or product adjacency plays, or different kinds of software plays that they get into.
00:10:12:08 Much less even thinking about whether or not they establish their business as a platform for growing in the industry differently than what they have today, which in some cases might be the simple line of sight that says, I deliver a health plan product, or I deliver healthcare services delivered by clinicians to concepts around:
00:10:33:03 I deliver better quality of life for my members, for my patients. I deliver health for them. And what are all of the things that go into that, that I need to start to think about as a part of my business and my reinvention of where we believe that our organization is going to be.
00:10:52:04 And perhaps nothing today, I would say, epitomizes the pace of change and how to think about your business differently than what we've seen in the last 12 months with gen AI. Where we've gone from AI, which to be clear, has been around for a number of years now,
00:11:09:10 and process innovations and optimizations to a very hands-on experience that allows me to either digitally upskill, reimagine experience entirely differently, or even put it into the hands of our members and our patients, or our consumers.
00:11:24:15 Clearer and better answers than what they may be getting from us. The subject matter specialists within health care today. All of this business model reinvention, we need to be thinking about it. It takes a longer time period than 12 months.
00:11:37:08 And so five years from now, ten years from now, what does that look like for our organizations? And at the back of all of this, there may be some cloud engineering that we do. There may be a complete transformation of our operations.
00:11:50:08 As I said, some disintermediation. But we can't forget that that kind of a reinvention also has to be built on a bedrock of trust. And I'm going to let Laura talk a little bit around what that trust might look like and why it's important to all industries, but in particular to health services.
LAURA ROBINETTE:
00:12:07:18 Thanks, Thom. Trust really brings it all time. It's foundational not only to our sector but to society. You just talked about generative AI and the importance to health care, but it really does stand to fundamentally change health care as we know it.
00:12:23:30 Whether it's a more timely diagnosis, improved R&D timelines, new medicine invention. And or just improving the customer experience. There really is tremendous opportunity in the sector, but it comes with risk. And trust in these new methods is critical.
00:12:44:16 Trust factors into every healthcare decision and interaction. Loyalty grows from trust. Consumers look for providers that can empathize and understand them. Patients who've had a bad experience with healthcare become easily discouraged from seeking that care.
00:13:01:04 The past several years have really taught us that consumers and stakeholders expect the sector to be prepared for everything. Who would have predicted a pandemic or the climate disasters?
00:13:14:04 Wars, embargoes, labor strikes, cyber-attacks. I mean, look no further than the recent cyber-attack in healthcare as a reminder of how interconnected our entire system is, and how crucial it is that leaders today factor risk and cyber security into their transformation plans at the beginning.
00:13:32:07 Especially those that entail digitizing processes and cloud computing and beyond industry-specific issues, how companies look to respond to climate, sustainability, and other social and governance issues, and to report on their progress really matters to healthcare consumers.
JENNY COLAPIETRO:
00:13:53:18 Thank you both. This is very powerful as we just hear more about the industry wide transformation, business model reinvention, more of the transformative M&A and building lasting trust. As we conclude, can you hit on what your biggest takeaways for our health leaders are? How can they act right away to change? Thom, we'll start with you.
THOM BALES:
00:14:13:18 So first of all, it wasn't going to be any easier as it was. And then Laura just talked about the industry wide cyber-attack, which is impacting so many of the players within health services today. When we talk about what is change and how do we get there, we really have to have a different view of what our business looks like at least five years out.
00:14:33:07 And we have to think about some of the big bets and some of the big challenges that shape our investments today to lead us to a different destination 5 to 10 years from now, that lead us to a place where the value chain, the business that we're in, has been reshaped.
00:14:47:06 And that comes with setting significant goals like a 50% lower delivery cost, a significant increase in the quality of an experience that a member or a patient has. The elimination of a middleman. There's so much discussion today that is going on within our industries, around middlemen.
00:15:04:07 Whether that be how products are delivered to the market, how pharmacy and life sciences intersects with care, and the shift in pharmacy and life sciences to being increasingly more significant and chronic part of that care as it goes forward.
00:15:18:06 But what does it mean for us to commit to the consumer across our life cycle is probably at the heart of this, and what would it mean for us to against that consumers significantly increase their lifespan. What we know is that just responding to these near-term needs is not likely to get us there, and we have to take a view of a destination.
00:15:37:08 And today, shaping small investments, but over the course of time that lead to a different place within our investment portfolio. We believe the business model reinvention and whole system transformation can be a part of that and ultimately help to deliver a different cost and quality equation for the health services market.
JENNY COLAPIETRO:
00:15:57:19 And Laura, your final thoughts on immediate actions the sector can take?
LAURA ROBINETTE:
00:16:02:00 I would echo some of the things that Thom just said, but the one thing I want to make sure you don't overlook are that there are some opportunities and tax as a driver of trust, and where that really comes into play is when companies are doing their strategic business planning.
00:16:19:00 Think about the ESG tax incentives that are out there. Things like power generation or transportation can be meaningful cost savings to health care companies. And there's also an element of government financial assistance awards that are available.
00:16:35:06 And can change how companies implement their sustainability strategies. I really think it's worth discussion and further investment and looking into some of these areas as it relates to tax, as a means to help companies advance their mission.
JENNY COLAPIETRO:
00:16:52:21 Great. Well, Thom and Laura, thank you so much for joining us today, and we invite our listeners to read the 2024 Next In Health Services report linked in the show notes, and to follow us on social media.
00:17:04:08 For more on these topics and other health industry insights driven by policy, innovation, and care delivery changes, please subscribe to our podcast at pwc.com/us/nextinhealthpodcast. Until next time, this has been Next in Health.
UNIDENTIFIED SPEAKER:
00:17:29:27 This podcast is brought to you by PwC. All rights reserved. PwC Refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the network. Each member firm is a separate legal entity.
00:17:42:07 Please see www.pwc.com/structure for further details. This podcast is for general information purposes only, and should not be used as a substitute for consultation with professional advisers.
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