Health care industry outlook
Volume 8, Summer 2021
- Health care consumerism is here to stay and will force significant changes in the way providers deliver care as well as market and charge for services.
- Cybercriminals are voraciously attacking health care organizations and continue to infiltrate their security protocols via ransomware attacks.
- The health care deal market is robust and will remain so through at least the balance of 2021.
- Updated guidance provides further clarity and requirements on Provider Relief Fund reporting.
For millions of health care consumers in the United States, the cost to deliver their care is significant and on the rise. The proof is in the data.
In 2019, the national health care expenditures (NHE) grew 4.6% to $3.9 trillion, representing 17.7% of gross domestic product. Spending per person was $11,582 and according to the Centers for Medicare and Medicaid Services (CMS), the NHE is projected to grow to 19.7% by 2028.
Further, according to NCR Health, three out of four consumers feel their health care decisions are the most important—and expensive—decisions they’ll ever make, yet four out of five admit to finding it difficult to compare cost and quality during the decision-making process. This is in stark contrast to other industries where a consumer can access cost, benefits and features to guide their purchasing decisions.
From evolving consumerism needs to a robust deal environment, key areas are heating up for health care organizations this summer and in the coming months.
Delivering consumerism: Personalization, access, incentives, innovation
Health care consumerism is defined as people proactively using trustworthy, relevant information and appropriate technology to make better-informed decisions about their health care options within and outside the clinical setting. As the chart demonstrates, health care costs are growing, with consumers paying more for premiums and out-of-pocket expenses—a signal that providers need to consider significant changes in the way they deliver care, as well as market and charge for services, to more closely align with other industries that strive to operate like retail businesses.
Patients want high-quality, easily accessible care at an affordable price. With that in mind, how can providers attract and engage consumers to better meet their needs and preferences? Results of McKinsey’s 2018 Consumer Health Insights (CHI) Survey identified four areas of opportunity for providers, payers and other stakeholders:
Personalization. One size does not fit all. It is wrong to presume that all health care consumers want the same services. Payers and providers can better meet consumer needs with personalized services and information, delivered when, how and where they need it. The CHI survey identified six consumer segments that dictate the frequency and degree of personalization required, including the constrained chronic care consumer, disadvantaged disconnected user, busy convenience user, engaged traditionalist, loyal informed consumer, and the healthy convenience seeker.
Access. In all consumer segments identified, most survey respondents indicated they want access to care when they need it, and if it’s not delivered, they will go elsewhere. Those results suggest providers should change the way they think about access, moving beyond traditional delivery methods and better utilizing digital tools. As a result of COVID-19, many providers did expand digital solutions for consumers—primarily through telehealth services—but there is still significant opportunity for growth in this area.
Incentives. Survey results suggest providers and payers need to provide consumers with well-designed incentives, rewards and penalties, in conjunction with tools and information, to better enable consumer decision-making. Respondents named incentives as one of the top three new industry product concepts that might encourage them to take actions that would reduce costs.
Innovation. The survey indicated that consumers want innovation in and changes to the current health care system. Twenty-one percent of respondents mentioned system reform as a top priority, and 55% want increased benefit coverage for medical services. When asked to rate measures that would most improve hospital and outpatient care, respondents most often selected greater cost transparency and increased insurance acceptance and coverage.
Cyberthreats remain top industry risk; costly for many
Cyberattacks within health care continued to surge during the first half of 2021. Breach reports to the Office for Civil Rights (OCR) from January through June include 225 hacking-related incidents affecting over 21 million individuals. Hacking incidents remain the most common type of OCR-reported breach and have more than tripled compared to 2020. One hundred fifty-eight health care organizations fell victim to a hacking incident, affecting 13 million patient records, during January to June of 2021.
Cybercriminals are voraciously attacking health care organizations and continue to infiltrate security protocols via ransomware attacks. An attack involves stealing valuable patient information, locking the organization out and requiring payment to retrieve the stolen information. While many health care organizations have increased their investments in cybersecurity, efforts so far have been insufficient to keep attackers at bay.
According to the NetDiligence Cyber Claims Study 2020, ransomware was the leading cause of losses among middle market companies last year, a trend we expect to continue through the remainder of 2021. On average, ransomware attacks in 2019 cost organizations $275,000 per incident and $175,000 in ransom demands, according to the same report.
The health care industry continues to generate headlines reporting ransomware attacks, gaining the attention of the Biden administration, which issued new regulatory guidance in order to help organizations protect themselves from cyber criminals. The executive orders issued on June 2, state five practices for organization consideration which include:
- Backup your data, system images, and configurations, regularly test them, and keep the backups offline. Ensure that backups are regularly tested and that they are not connected to the business network, as many ransomware variants try to find and encrypt or delete accessible backups.
- Update and patch systems promptly. This includes maintaining the security of operating systems, applications and firmware, in a timely manner. Consider using a centralized patch management system; use a risk-based assessment strategy to drive your patch management program.
- Test your incident response plan. Run through core questions and use those to build an incident response plan: Are you able to sustain business operations without access to certain systems? For how long? Would you turn off your operations if business systems such as billing were offline?
- Check your security team’s work. Use a third-party penetration tester to test the security of your systems and your ability to defend against a sophisticated attack.
- Segment your networks. It’s critically important to employ network segmentation and to carefully filter and limit internet access to operational networks, identify links between those networks, and develop workarounds or manual controls to ensure they can be isolated and continue operating if your corporate network is compromised. Regularly test contingency plans such as manual controls so that critical safety functions can be maintained during a cyber-incident.
Cybercriminals are voraciously attacking health care organizations and continue to infiltrate security protocols via ransomware attacks.
We expect more scrutiny around health care cybersecurity and believe cyberthreats will continue to escalate unless organizations take aggressive measures to ensure data safety. Health care organizations should evaluate their cybersecurity playbook and determine where their gaps remain. In addition, cyber insurance should be evaluated to determine contract contingencies and security requirements to be managed by the insured. For more, RSM explored the insurance topic as well as other insights in a special report on cybersecurity earlier this year.
Deals are hot in health care
The health care deal market is robust and will remain so through at least the balance of 2021. Private equity and strategic buyers have capital to deploy, and the challenges of the COVID-19 pandemic have pushed incumbent organizations to consider new acquisitions or divestitures. Growth in demand for new health care investments is outpacing growth in supply of quality assets across most subsectors, which is pushing up multiples. These elevated multiples have also led to a historic number of health care service initial public offerings (IPOs) in 2021 so far.
Deal activity is particularly high among more traditional clinical outpatient and hospital inpatient service providers. Though health care technology remains an active area for investors and a popular topic in the news media, the reliable strategy of horizontal and vertical integration of organizations that directly provide clinical care remains alive and well.
In the first half of 2021 we have seen 65 deals of hospital or other inpatient care providers, as compared to 87 in 2020 and 79 in 2019, according to data compiled by Pitchbook. Even more remarkable than the number of deals is the capital invested: $13.3 billion so far in 2021, compared to only $3.1 billion in 2020 and $6.3 billion in 2019. This year has so far seen the most capital invested in hospital and inpatient providers since at least 2017, and the year is only half over.
The $13.3 billion investment in hospitals and inpatient services has been buoyed by several large deals involving Iora Health, New Hanover Regional Medical Center, and LifePoint Health's acquisition of Kindred for $9.5 billion, among others. While many of these deals are still subject to shareholder or regulatory approval, we may see more mega hospital and inpatient deals in Q3 and Q4.
According to data compiled by Bloomberg, private equity investors have $224 billion in dry powder aimed at health care in the United States. For context, this amount could purchase approximately 17 aircraft carriers. Some strategic players, such as hospitals and health care systems, also find themselves with cash to invest in acquisitions.
The amount of money earmarked for health care acquisitions or other deals is increasing faster than new hospitals, physician groups or health care suppliers are being formed. As more money chases fewer companies, valuation multiples—i.e., the prices of deals—are increasing across most health care sectors. Of deals with publicly available data, recent outliers in Q2 include Partner Group’s $800 million acquisition of Axia Women’s Health at 20 times EBITDA and Gainwell’s $3.2 billion acquisition of HMS's at 22.6 times EBITDA; and in Q1, Centene's $2.2 billion acquisition of Magellan at 12.5 times EBITDA. Anecdotally, across the private health care deals we see multiples regularly in the low- to mid-teens in many sectors.
This environment of elevated multiples, along with low interest rates and other macroeconomic considerations, has led to a surge in health care IPOs. 2021 has so far seen 29 of these transactions, more than 2019’s total (20) and quickly approaching 2020’s (37).
The 2021 listings have also raised $11 billion, which is more capital than the 2018 and 2019 listings of $8.6 billion and $2 billion combined. The 2020 listings raised $11.7 billion, an amount 2021 will likely exceed. These figures exclude biotech and pharmaceutical listings, which have also been red-hot.
MIDDLE MARKET INSIGHT
We expect health care deal activity to remain robust at least through the rest of 2021. Investors and executives are seeking to reposition themselves for post-pandemic growth, interest rates will remain low, and some investors and founders are eager to close deals before any potential changes to the capital gains or carried interest tax codes.
Regulatory and legislative outlook
As many health care providers emerge from the effects of COVID-19, some issues perhaps overlooked during the pandemic are coming into focus. One is the reporting requirements for grants from the U.S. Department of Health and Human Service’s (HHS) Provider Relief Fund (PRF).
On June 11, HHS released an updated version of the Post Payment Notice of Reporting Requirements extending the period for the use of funds; unfortunately, the extension is limited to payments received after July 1, 2020.
Many health care providers, in particular hospital systems, received a large portion of their PRF funds before June 30, 2020. Those payments still have the same period of availability, which expired on June 30, 2021. The June 11 guidance also introduced a new reporting concept based on when the funds were received, creating an additional, unexpected burden on recipients.
Lastly, on July 1 the reporting portal opened with yet more guidance, regarding lost revenue—a critical component in how recipients will demonstrate their adherence to the terms and conditions of the grant. The HHS guidance now provides the opportunity to measure lost revenue on a quarterly basis for the period of availability. Although only quarters with a loss can be added together to determine lost revenue, lost revenue not reported in one reporting period can be carried forward to future periods. These changes to the measurement and permissibility of a carryforward were generally positive to most health care providers. As seen in the chart, for many health care systems, PRF funds, which are a significant portion of the Coronavirus Aid, Relief, and Economic Security Act funding, are the difference between losing money and making money.
Other legislative and regulatory issues we continue to monitor include:
- What’s next for the Affordable Care Act? It recently survived yet another legal challenge. We will continue to watch for any legal challenges that arise through 2022.
- Surprise billing: CMS recently released their interim final rule related to surprise-billing reform. We anticipate a potential widening of the rule through future legislative efforts.
- Congress continues to focus on private equity’s role in health care, an issue we’re tracking as well.