United States

Health care industry outlook


As the pandemic’s impact on the health care industry continues, health systems, hospitals, physician practices and more look to address challenges and find opportunities to meet the growing needs of patients and their communities. From embracing price transparency considerations to finding new areas for investment and deal-making in digital health solutions, the outlook for health care in a challenging environment is one of great transformation amid ongoing uncertainty.

Key takeaways

  • Health care organizations should continue to lean into price transparency efforts.
  • Deal volume remains depressed, but healthtech creates investment interest.
  • Elective procedure delays cause sweeping impact from health care organizations to patients.
  • While most clinical roles will return to standard onsite work eventually, a portion of the nonclinical roles within the health care setting will likely remain remote.

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Patient demand for price transparency will increase

The regulatory considerations related to price transparency have been a routinely covered topic for over a year now. Last June, President Trump issued an executive order focused on price and quality transparency. Subsequently, the U.S. Department of Health and Human Services issued the regulations that need to be followed. The regulatory considerations are one aspect of price transparency; another is the furtherance of the overall trend of consumerism in the health care ecosystem.

As shown by the chart, considerably more people were covered by high deductible health plans (HDHPs) in 2018 than in 2010, and we would expect this trend to continue to grow through 2021. The effect of this change is consumers are now engaged in the economics of health care in ways they were not before. Additionally, hospitals have a larger issue in collecting for their services as collecting from a patient can be more difficult, especially if that patient has low income. One way patients have been able to pay for the portion of the health care services they receive is through health savings accounts (HSAs). These are often partially funded with employer contributions. However, as the chart indicates, lower wage earners have less access to HSAs, thus potentially further compromising the ability for health care providers to collect from these patients.

As consumerism continues to force patients to make decisions based on value, their need for price transparency becomes critical. If one compares shopping for a medical procedure to buying a vehicle, it is easy to understand why a higher trim level of the same vehicle costs more; it comes with more options and likely a better experience. However, as a consumer, you want to see both the price and the options that are different between the two trims before making your decision of which one to buy. In health care, this doesn’t exist in most of the health care ecosystem. It would be nearly impossible for you as a consumer to evaluate the true value of a procedure without those two components. In 2010, this was not as important to the consumer as they had far less at stake, there were fewer people covered by deductibles; additionally, the deductibles today are much higher. According to the U.S. Bureau of Labor Statistics, in 2018, the median family for in-network services was $3,000.

The outlook into the next quarter and further into 2020 for the health care ecosystem calls for consumers continuing to demand price transparency. They demand transparency be provided to them in a manner similar to their experience with other services, i.e., they want to be able to make decisions using data and electronic tools, likely on a mobile application. We continue to recommend to providers and payors the more consumer centric you can become, the more likely you are to be successful in the new environment. Consumers are buying cars on services like Carvana and using tools like Redfin to sell their homes; they are using digital applications for a significant portion of their lives and for purchases we thought were too sacred for a digital environment even just a few years ago. We urge organizations to consider their ability to lean into the movement.

Depressed deal flow, but digital health solutions show promise

Health care deal flow in the second and third quarters was reduced to $7.5 billion from $19.5 billion over the same period in 2019, according to data compiled by Pitchbook. This $12 billion decrease can be attributed to uncertainty surrounding COVID-19 and its effects on health care and the economy. Deal volume declined to 250 from 366 total deals reported over this same period last year as many smaller, less complex deals (the type that does not typically report a dollar investment size) continued to close.

Would-be investors or acquirers were hit with a slew of challenging dynamics: prohibitions on nonemergent or elective surgeries, changes to telehealth reimbursement and regulatory requirements, and preparing for increased hospitalizations. In response to these challenges, many such market participants focused efforts on running existing organizations and put deal-making on the back burner.

During this time, the deals that did close often did so at depressed multiples compared to pre-pandemic times. As sellers seek quick cash or look to align with bigger partners the supply of available organizations to invest in or acquire increases. The demand has decreased, as mentioned previously. This increase in supply and decrease in demand will push the valuations down. We expect this trend to continue, particularly in the physician practice space even as demand for deals recovers.

Despite this extraordinary reduction in deal activity, we saw the first signs of what may be a changing health care deal environment. Multiplan, a health care cost analytics provider and third-party administrator, will go public through a special purpose acquisition company (SPAC) at an approximate $11 billion enterprise valuation. While deals involving SPACs were somewhat uncommon in most industries until recently, they were nearly unheard of in health care. Other notable health care deals include virtual care platform Teledoc’s $15 billion acquisition of virtual chronic condition management provider Livongo, Bright Health’s $635 million capital raise and AmWell’s $742 million capital raise with a post-initial public offering valuation of $5 billion that was preempted by Alphabet’s Google investing $100 million.

The common thread here is these companies all focus on digital health solutions. If we compare health care to financial services, another highly regulated industry, we see that investment in digital solutions and (nonmedical) innovation in health care has seriously lagged.

The rapid deployment of telehealth and virtual health solutions in response to the pandemic has accelerated the opportunity for these solutions to influence the future of health care. Strategic and financial investors will seek opportunities in this space.

Furthermore, as traditional health care service provider consolidation opportunities become less attractive, we expect to see increased attention to health care deals that do not include direct reimbursement risk, particularly from financial buyers such as private equity sponsors.

Political uncertainty will likely factor into the future of the deal environment of this highly regulated ecosystem. Increased uncertainty, regardless of the source, generally dampens deal activity. In the past, hospital consolidation attracted consistent attention from health policy researchers and state attorneys general. As deal volume picks up and remains consistently high, we expect that scrutiny will expand to additional subsectors within the ecosystem.

COVID-19 will continue to affect the health care ecosystem and certainly the health care deal environment for years to come. As we all adjust to the next normal, uncertainty decreases, and executives and investors begin traveling more regularly, we expect deal volume will rebound to and eventually exceed pre-pandemic levels. The mix between investments in physical health care providers and digital health solutions may, however, have changed for good.

Impact of delays in elective procedures

In March 2020, Centers for Medicare and Medicaid Services announced that elective surgeries and nonessential medical and surgical procedures should be delayed until the COVID-19 pandemic ends in an effort to preserve personal protective equipment for front-line workers. Faced with having to make an incredibly difficult decision, health care providers considered bed capacity, patient health risk and quantity of available personal protective equipment in deciding which elective procedures would be delayed.

Using data from 359 hospitals across 71 countries, the World Economic Forum reported that CovidSurg Collaborative used a statistical model to predict that 28.4 million elective surgeries worldwide would be canceled in the 12-week period since March; each additional week of disruption could cause 2.4 million more cancellations globally and more than 300,000 in the United States; and the backlog could take 45 weeks to clear.

Over six months into the pandemic, COVID-19 and the resulting delays in elective procedures have wreaked havoc on health care infrastructures across the country. Estimates indicate that U.S. hospitals are losing more than a billion dollars per day, and the American Hospital Association is reporting that hospitals are losing more than $50 billion per month.

Hospital operating margins are down a full 96% since the start of 2020 compared to the same seven-month period in 2019, not including Coronavirus Aid, Relief and Economic Act funding and even with federal relief, operating margins are still down 28% year to date compared to January-July 2019, according to Kaufman Hall’s August 2020 National Hospital Flash Report. These declines come as hospitals experience flat revenue performance, continued high-per-patient expenses, and falling volumes causing some hospitals to lay off staff, cut hours for medical providers and even file for bankruptcy.

Kaufman Hall’s report shares that hospitals nationwide saw a fifth consecutive month of volumes falling below 2019’s performance and below budget across most metrics, although July volumes showed some signs of recovery month to month. Emergency department visits continued to show the most significant declines falling 17% compared to the same seven-month period in 2019.

The impact of delayed elective procedures are beyond financial. It’s causing deteriorations in health, worsening quality of life, increased disability and decreased work capability for patients, according to a study published in the British Journal of Surgery.

Considering the backlog and the capacity restrictions, excessive delays in elective procedures could also cause unnecessary death. While the full impact isn’t yet known, the cancellation or postponement of cancer surgeries alone, estimated at 38% by CovidSurg Collaborative, will significantly affect the well-being of current cancer patients and delays in the diagnoses of others at a later stage of their disease, of others.

And then there’s the impact to mental health. Physicians have reported a drastic increase in patient anxiety over delays in their elective procedures, according to an article in the Washington Examiner, which have resulted in patients believing they have more symptoms, making it harder for physicians to tell which symptoms are real and which are not. Physicians also noted an increase in opioid use in patients who had their elective procedures delayed and potential increases in emergency cases and unnecessary complications, according to the article.

Many unknowns exist when it comes to COVID-19, but this is certain: the pandemic has created significant volatility on hospital operations economically and has taken a toll on the health of society’s most vulnerable individuals, both physically and mentally.

The journey to work

The pandemic accelerated working from home within the health care industry. While some believe working from home will not be permanent, many employees appear to enjoy the flexibility that remote work has created and seek some form of a permanent work from home arrangement. As a result, it appears the industry may not return to standard office work policies.

Health care organizations that most effectively embrace the new work-from-home culture will be better positioned to attract and retain top talent as health care employment stabilizes.

There is still much uncertainty regarding the future of work within the health care industry. As reflected in our last outlook, the reduction in health care labor is atypical during a recession and the industry is still slowly recovering. At the start of the pandemic, health care organizations were forced to reduce head count and required administrative staff and many clinicians who were not directly treating COVID-19 patients to work from home. According to HCA Healthcare, over 90% of their support staff was moved to working from home during Q1 2020 and more than 40,000 employees were migrated to a remote workforce in one week. However, in August 2020, we saw a continued decline in remote workers and a slight increase in hiring, which may suggest that people are slowly returning to the office.

There was a slight resurgence of health care employment in August. This could be a result of the reinstatement of elective surgeries. According to data reported by the U.S. Bureau of Labor Statistics, health care employment increased by 75,000 compared to July 2020 (or to the year-ago period). There were gains in physician offices (27,000-plus), dentist officers (22,000-plus), hospitals (14,000-plus), and home health care services (12,000-plus). Job losses continued in nursing and residential care facilities (14,000-minus).

There have been 17,896 remote job postings within the ambulatory health care services and hospital setting over the past recent weeks, according to Economic Modeling, LLC’s job postings dashboard. The top remote job postings are listed in the chart with telemarketers, clinical and counseling/school psychologist, substance abuse/behavioral counselors, and mental health social workers increase over 200% from the prior year.

Why are people still working remotely?

We are still in the midst of a global pandemic, and employees remain concerned about their own health and safety. Many people are hesitant to return back to the office, and some cannot due to personal commitments such as at home child care/schooling. Also, many employees love the flexibility that working from home brings and have now experienced it firsthand. A recent Global Work from Home Survey indicated that on average people would like to work from home two days a week post pandemic.

Younger generations are changing the future of work with their desire to work remote. Millennials and Gen Z workers make up 38% of the current workforce and will reach 58% within the next decade, according to recent reports. In addition, the Global Work from Home Survey indicates 60% of the millennials surveyed would give up their office space to work from home.

The rise of millennials within the health care setting has changed the health care provider profile, even before the pandemic. Millennial providers focus on technology to connect and treat patients in more convenient and remote ways. Providers can be reached in many ways thanks to advancement in technology. For example, telehealth allows providers to treat patients anytime and anywhere. Remote work apps and tools such as Slack, Zoom and Microsoft Teams can make working remote easier and collaborative. These apps and tools are leveraged by younger generations on a daily basis.

The pandemic has forced so many to work from home, and the health care industry is no exception. While most of the clinical roles will return to patient facing, we believe a portion of the nonclinical roles within the health care setting will remain remote. We know the health care industry is slow to adopt change and technology; but the adoption of remote work apps and tools by younger generations coupled with the increase in telehealth and patient preference to stay at home, creates a work environment primed for flexibility in work arrangements. The next few months will show us how willing people are to return to the office and how many organizations are adapting to employees’ desires to remain at home.


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