United States

Health care industry outlook


Key takeaways from the winter 2020 health care industry outlook

  • Digitization of health leads to new and augmented services for the industry.
  • Value-based care continues to gain momentum.
  • Strong mergers and acquisitions deal volume will continue.

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The health care industry is nearing an inflection point. Driven by increased digitization, consumer demand for value-based care and increasing transparency, health care providers are working to enhance their use of data to improve service and bring down costs. The health care industry is a strong innovator, and is gaining efficiencies through important techniques such as telemedicine and self-managed care aided by technology.

Meanwhile, the industry struggles with a lack of skilled professionals and is looking for alternative sources to cultivate new talent. Strong deal flow will continue as the still-fragmented health care ecosystem looks to gain more economies of scale through consolidation. 

Digitization of health

The explosion in digital health data creation, storage and processing will lead to new and augmented health services as well as legal, regulatory and ethical discussions on the use of that data. Participants across the health care ecosystem, including newcomers, must leverage these tools in strategic ways as they seek to provide better care to more people at a lower cost.

International Data Corporation estimated the amount of data in the global datasphere to be 33 zettabytes in 2018 and will grow to 175 zettabytes by 2025, which represents a compound annual growth rate of 27%. For reference, according to IDC, it would take a person 1.8 billion years to download 175 zettabytes of data on an average U.S. internet connection.

The growth of health data is set to outpace general data growth: 36% from 2018 through 2025 compared to the aforementioned 27%. This growth will be driven by an increased number and quality of data images, growth of wearable and internet of things-enabled technology and advancement in data analytics. Effectively harnessing the potential of this data flow will become more important as providers look to improve operations and capture additional volumes, particularly among the commercially insured populations.

The growth of health data and increasing consumer trends in health care have also attracted new, techfirst entrants; companies that are not incumbent health care players. These companies, which are primarily startups, have attracted increased levels of funding. Of the nearly $26 billion invested in digital health since the financial crisis, 57% has been invested in the last three years. 

We expect high levels of digital health investment to continue through 2020. Some of the emerging areas we’re watching focus on wellness and mental health and include companies working to improve sleep, monitor and interpret consciousness, and create brain-machine interfaces.

The industry is at or near a virtual health inflection point. We have seen a surge of private investment in the space. Ninety-four percent of commercial health plans and 92% of Medicare Advantage plans offer at least some type of virtual care service, and 96% of providers plan to expand virtual care services. We expect to see rapid consumer and physician adoption of these technologies in the near-term, and rapid expansion of available services. Providers must lean into virtualized health as they seek to expand access and improve outcomes.

As virtual services expand and allow greater insight into our health and coordination among providers, payers and patients, we expect heightened conversations around health data privacy and ownership. Regulators and governments are keen on tackling this issue as preemptively as they can in the wake of the data scandals that recently roiled major U.S. tech companies

The central question for governments, industry players and patients will be: Who owns health data? While the dialogue may extend beyond 2020, we expect it will result in patients owning their data consistent with themes of the EU’s General Data Protection Regulation. We will watch to see the ecosystem that evolves around that decision. Will patients have control over who can use their data when and for what purposes, or will that data find its way into one or more private or government data lakes where all participants in that silo can use that data as desired with little friction?

We expect 2020 will see some type of HIPAA modernization, whether administrative or legislative. We will watch to see how the update addresses this crucial question.

As data becomes more prolific and is shared among organizations, we also expect to see more cybersecurity breaches or missteps. This will have a significant effect on smaller providers because the costs of those breaches are generally much higher. According to our recent study compiled in partnership with NetDiligence, the average cost of a breach for an organization with over $2 billion in revenue is $128,000. The average cost for an organization with revenue under $2 billion is nearly 25 times higher at $3,183,000. Providers, especially those in the latter group, will need to evaluate their cybersecurity infrastructure and response plans as they begin using more and more data. 

March to value

Value-based care continues to gain momentum throughout the U.S. health care industry and is likely to carry into 2020. With over 10 million Medicare beneficiaries (18%) assigned to an accountable care organization, it seems that health care organizations are moving away from the traditional fee-for-service care model and adopting some form of a value-based care program.

As regulatory standards begin to ease, we will see more organizations shifting to some form of a value-based care program, such as accountable care organizations. On Oct. 9, 2019, the U.S. Department of Health and Human Services announced proposed changes to Stark Law and the anti-kickback statute. This proposed rule further shifts the care model paradigm by allowing health care providers who participate in valuebased arrangements to coordinate patient care with other providers. This initiative strives to increase the quality of care provided to patients by facilitating outcomebased payment arrangements that reward improvements in patient health. According to Centers for Medicare and Medicaid Services, the changes would also make it easier for physicians and other health care providers to ensure they are complying with the law by offering specific safe harbors for these arrangements.

Definitive Healthcare polled approximately 800 health care leaders to gain a better understanding of the factors accelerating the adoption of value-based care models. The results indicated that a majority of respondents (~45%) believe an increase in provider compensations and incentives will continue to drive growth. Other factors mentioned included policy requirements, an increase in risk-sharing models like ACOs, and consolidating markets, mergers and acquisitions

Evolution of the deal

We expect strong deal volume through 2020. The past few years were both active and dominated by large deals. We anticipate deal activity to remain consistent or perhaps even increase, and we will likely see fewer, if any, large deals.

One notable large deal on the horizon is the potential take-private transaction of Walgreens Boots Alliance led by private equity firm, KKR. The deal would be the largest leveraged buyout in history. Analysts estimate it could cost as much as $80 billion, $50 billion of which would come from debt (62.5% levered). The largest LBO completed to date was when KKR led a consortium that took Energy Future Holdings Co. private for $48.4 billion. That deal was financed with approximately 35% debt, or $17.4 billion. Interestingly, the third-largest LBO occurred when Bain took HCA private in 2006.

Particularly among providers, we expect smaller tuck in acquisitions (e.g., large systems buying single hospitals or physician groups) or alternative deals such as creating a venture fund or partnering with organizations from outside traditional health care.

We do not expect to see many, if any, megamergers among traditional health systems in 2020, primarily because many of the megasystems have already been involved in sizable transactions. Furthermore, given the increasing scrutiny over health care costs within the current political environment, these large transactions may face increased antitrust scrutiny.

However, there exists opportunity for effective, efficient and generally large systems to tuck in acquisitions to gain market share in existing geographies or to gain access to new geographies. Additionally, we will be watching for more acquisitions of or affiliations with nonprofit systems by for-profit systems. Since HCA acquired Manorcare in 2018, we expect to see more such deals provided the political climate remains accommodative of for-profit entities’ further investment in health care providers.

We also expect additional investment in digital health, both from legacy provider, payers and other market participants, as well as organizations outside what is traditionally defined as health care. Both 2018 and 2019 saw significant digital health investment, and we expect 2020 will continue at or exceed those levels. One active area we are watching is assistive tech, technology meant to improve the function of people living with disabilities.

This includes companies like OrCam and Whill, which are developing artificial vision and personal mobility solutions, respectively. These applications have the potential to change what the industry thinks of social determinants of health and comorbidities.

Finally, in the ever-changing world of the U.S.’ $3.5 trillion health care market, we may just see something truly shocking like Walmart purchasing a physician group, Amazon buying a generic drugmaker for its own private label brand or Google investing in its own electronic health record platform. While the private sector may produce some shockers in 2020, we would advise against overreacting to nascent political disruptions, namely so-called Medicare for All. In our view, it is very unlikely such policy will be implemented in the near-term, if at all. While it may be a useful exercise for health care leaders to discuss the potential impacts of such a shift in health care, the possibility of Medicare for All should not generally make or break a deal of any stripe.


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