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Health care industry outlook

Customer expectations drive change in the health care industry


Key takeaways from the fall 2019 health care industry outlook

  • Value-based reimbursement gains traction amid push for accountability.
  • The emphasis on accountability is driven in part by customer expectations as out-of-pocket expenses rise.
  • Labor shortages are pressuring health care providers to become more efficient.
  • Legislation will drive change, particularly with issues like surprise billing, rising drug prices and nonprofit status.
  • Low customer satisfaction scores are fueling investments in firms aimed at disrupting a calcified industry. The health care sector is continuing to see robust activity in mergers and acquisitions.

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As health care reform has continued to gain momentum in recent years, a quiet shift has been taking place in the way providers are reimbursed. Increasingly, insurers and government agencies are moving away from the traditional model of paying directly for a service, and instead, are adopting one that rewards overall outcomes. Such value-based reimbursement factor a more holistic approach to patient care, rewarding good medical outcomes over frequency of service. The data is starting to show that this approach is gaining greater traction in the marketplace—both in the private sector and among government agencies.

Since Alex Azar took over as secretary of Health and Human Services in January 2018, HHS has taken a more aggressive stand to promote value-based care methodologies. As the Center for Medicare and Medicaid Innovation has rolled out these ideas, commercial health plans have continued to push value-based reimbursement.

UnitedHealth Group has stated that 60% of its payments for health care services for its members are tied to value-based care models. Humana has said 66% of its Medicare Advantage members are in a value-based reimbursement network.

Medicare has also seen substantial growth in its shared savings programs. According to the New England Journal of Medicine, large health care organizations are pursuing a wide range of value-based care models.

According to the New England Journal of Medicine, infrastructure requirements, including information technology, are the largest barriers to implementing a value-based reimbursement model. This may be because health care providers often do not have sophisticated cost accounting systems. It is nearly impossible to determine if a value-based care model is financially viable if an accurate measure of the costs to provide services cannot be made.

MIDDLE MARKET INSIGHT Before entering into value-based reimbursement models, it is important that health care providers consider their ability to accurately and precisely determine their cost structure as well as understand the complexity of the quality and patient outcomes reporting requirements from the various payors you are entering into these discussions with.


Patients are increasingly demanding the same types of interactions from their health care insurers and providers as they experience with other consumer-facing companies. Ultimately, health care ecosystem participants must strive to deliver an on-demand, individualized and customized experience similar to that offered by Google, Amazon or Netflix.

Several factors drive this trend: First, patients are paying more out of pocket for health care services than they have historically, so they are scrutinizing their bills ever more closely. The average deductible has more than doubled over the past 10 years, and co-pays are generally rising for the commercially insured. The Centers for Medicare and Medicaid Services expects this trend to continue into the future. As patients pay more, they expect more.

Second, demographic changes will pressure health care ecosystem participants to embrace consumerism. Americans born in the 1980s and after—the millennials and Gen Z generations—are making more health care decisions and are accustomed to high-touch technology interactions.

This is particularly true for the Gen Z cohort; they did not know or do not remember a time before the internet and digital technology.

MIDDLE MARKET INSIGHT Health care ecosystem participants, particularly providers, are focused on how to best serve retiring baby boomers, but may be missing the waves of millennials who are starting families and Gen Zers who are aging out of their parents’ health plans.


Labor shortages, particularly of clinicians in rural areas, will remain a key challenge for health care providers througout 2020. While the industry is adding jobs, and medical school and nursing school enrollments are improving, the rate of change is insufficient to meet the current demand for physical labor. Meanwhile, provider organizations of all types are under pressure to create more value per employee. The primary solutions to this challenge will be process improvement and transformative technology.

Health care providers, as defined by the Bureau of Labor Statistics, tend to add more employees each month than the rest of the industry. Yet the head count does not increase fast enough to meet demand.

In December 2018, health care providers hired 35,000 more people than left the industry. Total health care job openings, however, exceeded 1.2 million.

Looking ahead, more will be required of industry employees. Health expenditures have grown faster than medical school acceptances over the past four years, a trend that will continue through 2019 and beyond. As a result, the labor pool is growing slower than the value that the labor pool must create. This will require health care participants to invest in productivity-boosting technology.


MEDICARE FOR ALL: Continued media coverage has sparked a national discourse on a concept referred to as Medicare for all. Bills have ranged from those that mirror a universal health care model to those lowering the age of eligibility to buy into Medicare. The current consensus is that nothing is likely to happen in the next two years. With an election year for President Donald Trump as well as 35 senators fast approaching, health care is expected to be near the top of the list of most discussed issues. Health care was the most important issue for voters in the 2018 midterm elections, marking the first time an issue other than the economy dominated voters’ decisionmaking in over a decade.

SURPRISE BILLING: There will most likely be legislation to combat the issue of patients receiving surprisingly large medical bills after being treated, for example, at an emergency room. Such a bill was introduced into Congress this year, and many within the health care industry feel it has a high probability of passing into law. The issue has bipartisan support and passage of legislation by Congress would benefit supporters who are up for reelection in 2020. This legislation would be most beneficial at the federal level, because states do not have the ability to regulate self-insured plans of large employers.

PHARMACEUTICAL PRICE REGULATIONS: Steady conversation in Washington about adopting price controls over pharmaceuticals, perhaps similar to those in the European Union, continues. Many organizations within the health care industry, however, share a concern regarding just how far price control regulation will go, particularly for Medicare Part B. Bloomberg LP recently reported that drug companies and their trade associations have spent more than $206 million on lobbying efforts, which is the most they have spent since 2009.

NONPROFIT STATUS: Iowa Sen. Chuck Grassley, the Republican chairman of the Senate Finance Committee, is ramping up efforts for oversight of not-for-profit status of hospitals. According to Modern Healthcare Metrics, the community benefits provided by non-forprofit health systems appear to have been increasing slightly over the past five years while operating margins have eroded. The apparent concern of Grassley, however, is how a “community benefit” is defined and accounted for. Charity care, for example, has been on a downward trajectory, but many health systems have continued to struggle with what should or should not be included as charity care.

PRICING TRANSPARENCY: On June 24, President Trump signed an executive order designed to improve transparency in the pricing of health care. It’s the latest move in an environment where consumers are exercising power over the cost of treatment, an area that historically offered them little wiggle room. Health care executives must consider that their consumers (patients) are now looking at their service offerings the way they look at any other products or services in the marketplace—with an eye toward quality and value.

The stated purpose of the administration’s executive order, Improving Price and Quality Transparency in American Healthcare to Put Patients First, is to “enhance the ability of patients to choose the health care that is best for them. To make fully informed decisions about their health care, patients must know the price and quality of a good or service in advance.”

On July 29, the Centers for Medicare and Medicaid Services issued a proposed rule related to the executive order. The rule would require hospitals to display negotiated charges for at least 300 services, 70 of which CMS would select, the other 230 to be selected by the hospital. The proposed rule, as written, would go into effect Jan. 1, 2020.


Health care is ripe for disruption, and more health care technology innovations and business models are expected to emerge in the coming months. The industry is fragmented with low net promoter scores—a measure of customer satisfaction—yet it represents nearly 20% of the U.S. economy. This creates ideal conditions that are attractive to problem-solving entrepreneurs, return-seeking investors and established players from other industries.

According to IBISWorld, which provides market research on the health care sector, no single enterprise accounts for more than 5% of total industry revenue. The lack of concentration creates space for entrepreneurs to operate since they generally do not have to compete against large and well-funded incumbents who tend to dominate other spaces.

Not only does the industry lack any relatively dominant players, but consumers also seem displeased with the experiences they have. Net promoter scores for health insurance companies and pharmacies rate below industries such as auto insurance and airlines. Only pay-TV companies and internet service providers rate lower than health insurance, according to a study by Satmetrix. As out-of-pocket spending in health care increases, so, too, will expectations for the quality of the patient experience.

Meanwhile, the ecosystem continues to grow faster than the broad equity markets. This growth is expected to continue, which will attract more investors, entrepreneurs and other participants.

In fact, 2018 had a record amount of investment in health tech disruptors; $8.1 billion by one estimate from RockHealth.com, nearly quadrupling the level measured only four years prior. Given the broad factors at work, funding in 2019 should exceed 2018 levels.

In September, CVS Health's Chief Digital Officer, Firdaus Bhathena, made several comments regarding their strategy around digital health, one publication (Fierce Health Care) wrote. “It’s part of a vision to offer in-person and virtual health care as easy to understand and pay for as Netflix," Bhathena said. Netflix has obviously disrupted the incumbent Blockbuster, now the question will be will CVS be able to emulate the Netflix model, but this time, as a traditional incumbent versus the startup model of disruption.


Health care continues to see mergers and acquisitions activity among some of the largest companies in the ecosystem. The deals can be aggregated into four main categories: vertical, partnerships, private equity and nonprofit.


Vertical M&A activity is garnering most of the media attention primarily because of the size of the deals, notably:

  • Cigna and Express Scripts
  • UnitedHealth and several provider groups
  • CVS and Aetna

UnitedHealth has continued to acquire provider groups, including Sound Physician Group, Genoa, Avella and DaVita Physicians, and is on its way to becoming the largest employer of physicians in the nation. As one of the largest health insurers, controlling a critical mass of providers, UnitedHealth is favorably positioned for payer negotiations with health systems.


An alternative to an acquisition is partnering to achieve vertical integration. Some of the more notable partnerships are those entered into by Walgreens Boots Alliance and the much-discussed JP Morgan, Berkshire Hathaway and Amazon joint venture known as Haven.

It’s been reported that Walgreens has created partnerships with several companies, including Kroger, Microsoft, Humana, UnitedHealth’s MedExpress and LabCorp. However, CVS appears to have better share performance then Walgreens. CVS’ deal with Aetna is now complete and CVS appears to be advancing quickly on their digital strategy.


Private equity has continued to show interest in health care, an interest expected to increase in 2019. The traditional private equity acquisitions in health-care target provider groups in certain specialties, such as ophthalmology, dermatology and anesthesiology. Large private equity deals include KKR’s acquisition of Envision and Apollo Global Management’s acquisition of LifePoint. After passage of the Affordable Care Act, investment in behavioral health became attractive because of the improvement of coverage and reimbursement by both commercial insurance plans and governmental payers. Increasingly, there is activity in home health and hospice providers as well, which is not surprising given the aging population.

Notably, in addition to the deals that have closed is the amount of “dry powder” or cash reserves available; current estimates suggest at least $60 billion of dry powder is available to be deployed in health care buyout funds.


The desire to achieve scale is not isolated to investor-owned health care companies; it also exists with the nonprofit providers as well. There was interesting activity in 2018 among nonprofit providers.

Closed successfully:

  • Common Spirit (Dignity/CHI)
  • Bon Secours and Mercy (Ohio)

Unsuccessfully closed:

  • Ascension and Providence Saint Joseph
  • Baylor Scott and White and Memorial Hermann
  • Atrium and UNC Health

The likelihood that larger mergers will occur in the nonprofit health sector is probable. The data supports this; in the past 10 years, the size of the seller in these deals has increased at a compounded annual growth rate of nearly 14%.


As the health care ecosystem seeks to navigate the changing regulatory, patient and technological environment, two predominant competitive strategies have surfaced. Some players, such as CVS and UnitedHealth, are betting on a tried-and-true approach to dealing with change—vertical and horizontal integration. Others, such as Walgreens and Haven, are pursuing a strategy built on joint ventures and other partnerships.

CVS and UnitedHealth have the cash advantage; the two companies have approximately $4 billion and $10.9 billion on their respective balance sheets. But Walgreens, with $785 million, may not need as much cash to execute its more partnership-oriented strategy.

Walgreens has struck a notable partnership with Microsoft. This three-phased approach, which the company calls “horizons,” will include:


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