The Current Healthcare Landscape and Outlook
Two-plus years into the worst healthcare crisis of the past century, there’s encouraging news on the horizon. COVID-19 may transition from pandemic to endemic at some point this year, which will bring great relief to an overburdened healthcare system. But by no means does this imply a return to pre-pandemic social, economic, or business patterns—certainly not for healthcare providers. Other headwinds remain, including:
- Tepid volume growth.
- The continued shift of volumes out of the health system.
- Reimbursement pressure from payers.
- Expense escalation at levels above revenue growth.
- Personnel shortages.
- Loss of supplemental CARES Act funding and advance Medicare funding payback requirements.
S&P and Fitch project a stable outlook in 2022 for the US healthcare not-for-profit sector, while Moody’s remains negative, largely due to labor costs and personnel shortages. Publicly traded companies may be positioned more favorably due to their assets being generally located in markets with faster growth, as well as greater access to capital. Whether the outlook is stable or negative, one thing most industry experts will agree on is that the business of healthcare will likely be forever changed as providers and payers embrace the types of innovations in care delivery and operations that helped them through the pandemic.
A New Era for Healthcare
Our healthcare system’s response to the pandemic has been nothing short of heroic, and because of their pandemic experience, many US healthcare providers have evolved into more agile, more integrated, more dynamic organizations. We often hear that the healthcare sector is settling into a “new normal,” but that implies a reasonably stable environment going forward. We believe we have actually begun a new era in healthcare—one that will be characterized by continued challenges from external market forces, market consolidation across every sector of the continuum, and the pervasive use of technology that could revolutionize healthcare delivery, consumer behavior, and purchasing patterns.
This new era requires accelerated change by health systems. Some are well positioned to navigate this new era, but many systems are not. Every health system should have a clear line of sight as to its clinical, operational, and financial priorities over the next 12 months, as well as a longer strategic vision that can anticipate and adapt to various market scenarios.
Merger and acquisition (M&A) activity among hospitals has been brisk for several decades, and the pace is expected to continue if not accelerate in the years ahead.
As many as two-thirds of health system leaders expect an increase in M&A activity, inclusive of hospital acquisitions/mergers and a significant focus on acquisition of physician groups and ambulatory surgery centers (ASCs). Many health systems seek growth as a strategy to improve operational cost efficiency and generate margins to fund capital investments and balance sheet liquidity. The American Hospital Association’s Fast Facts indicate that the percentage of hospitals in health systems has grown from 38% in 1990 to 67% today. One would think this trend toward building system scale through M&As has resulted in improved performance and value to purchasers. Yes and no.
This article was originally featured in the Quarterly Governance Institute February 2022 Newsletter.
Published April 5, 2022
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