The first part in this three-part series considered three trends related to broader socio-economic shifts in healthcare, including the federal Public Health Emergency, workforce shortages, and pressures from rising prices. This installment explores four trends that are internal to the industry with a focus on economic and market forces in health.

4. Declining profit margins at hospitals

   Kaufman Hall, a Chicago-based consulting firm, released a report in 2022 that shows that hospitals are experiencing some of the worst financial returns in the history of the industry. From a high level, the trend is due to such factors as higher-than-normal expenses for staff, supplies, and pharmaceuticals and lower revenues. Revenues are lower, in part, because more services (and oftentimes services that are more profitable) continue to migrate to settings outside the hospital and patients that hospitals are treating are sicker. These patients tend to need more care, which results with them staying at the hospital longer, thereby decreasing the hospital’s volume and revenue.

   What states should watch in 2023. The degree to which state governments intervene in the finances of hospitals varies. All states have leverage to impact the bottom line of hospitals based on how much they reimburse for services under their state Medicaid programs. They also have the option to provide support for hospitals through state budget actions that provide supplemental funding or through regulatory relief. The degree to which states intervene and how they intervene (e.g., increasing Medicaid rates, providing supplemental funding, decreasing regulatory barriers that may be driving up costs) will vary. Determining whether these actions are working to counteract the challenges hospitals face will be important as hospitals struggle financially.

5. Private equity (PE) in healthcare

   Studies show that the proliferation of private equity (PE) in healthcare continues. According to the Harvard Business Review, in 2018, the number of PE deals alone reached 800 with a value of $100 billion. Looking toward 2023, according to consulting firm PwC, PE companies still have plenty of “dry powder”¹ to invest in the coming year and healthcare dealmaking is thus expected to heat up in 2023. Despite PE’s access to resources and capital, many of these companies are financially unstable. A recent report by Moody’s credit rating agency indicates that almost 90% of healthcare companies deemed to be under financial stress are owned by private equity. Private equity’s expansion in healthcare has pros and cons. On the one hand, it brings much needed capital investments to certain markets. On the other, the profits of services linked to private equity go to shareholders and not always back to the community in which they operate.

   What states should watch in 2023. With its increasing role in healthcare, monitoring the proliferation of private equity and its impacts on the patients and communities in which PE operates care delivery entities will be important for states to watch. State policymakers may want to ask: Does it increase or decrease access and cost? What is the impact of private equity on the overall healthcare system in the state? Does the preponderance of PE result in healthier communities? Does it help reduce disparities? Depending on the answers to these questions, policymakers may need to consider whether regulatory actions should be taken to reduce potential negative impacts of the growth of private equity or, alternatively, take actions that allow for innovations that may positively impact health.

6. Consolidations

   Consolidation in healthcare continues. Health insurance is already highly consolidated. Five major insurers (UnitedHealth Group, Aetna, Centene, Humana, and Health Care Service Corp) provide coverage for nearly 46% of the market. On the provider side, a recent example of consolidation is the proposed merger between Advocate Aurora Health and Atrium Health, which will create a 67-hospital system. In terms of consolidations among different sectors within healthcare (e.g., insurance merging with pharmacy or technology companies buying provider groups) UnitedHealth’s acquisition of LHC Group will allow for the nation’s biggest private insurer to acquire another large physician group. The merger of CVS and Aetna is another example of two large entities within different verticals merging horizontally.

   What states should watch in 2023. Entities in the healthcare space are beginning to look more like conglomerates as opposed to just a provider or insurer or pharmacy or physician group. And within each of these verticals, entities are becoming bigger. Monitoring how consolidation is changing healthcare access, cost, quality, and care outcomes, and then determining how or if the regulatory framework for healthcare needs to evolve will be important for state policymakers. It will also be important to watch whether the act of consolidation (bringing together two previously independent entities) results in “integration,” which is more likely to eliminate duplication and allow for better management of the combined entities as a whole. If integration occurs, there is the potential for more coordinated care for patients. Alternatively, consolidations may result in a system that is difficult for the average consumer to navigate. The impacts of consolidation on access, quality, and cost of healthcare will be important to watch in 2023.

7. Alternate payment models

   The Affordable Care Act included several provisions to increase the use of alternate payment models with the goal of paying for better health outcomes rather than just the volume of care provided. Both federal and state governments have enacted regulations, programs, and payment incentives designed to achieve this goal. More recent versions of alternate payment model arrangements have focused on health equity. This is evident from the Centers for Medicare and Medicaid Innovation’s Strategic Refresh, published in October 2021, and the addition of new voluntary quality measures in 2022 related to equity. Those measures will become mandatory in 2023.

   What states should watch in 2023. States have been mirroring federal efforts by implementing alternate payment arrangements within their Medicaid programs. More states are now incorporating health equity as a measure that is tied to payment. In 2023, it will be important to monitor the degree to which states incorporate quality and health equity measures and incentives in their reimbursement for care delivery. It will also be worth determining whether these efforts are effective at improving outcomes and reducing health disparities.

The industry trends outlined in this blog are occurring on a large scale, which may make it difficult for states to monitor them beyond their own borders. But each trend has the potential to significantly impact healthcare delivery and access to services. Therefore, keeping an eye on all of these trends, collecting relevant data, and understanding the impact of each trend so that appropriate action can be taken if needed will all be important in 2023. As we continue to look forward, the next and final blog in this series will look beyond these internal industry trends towards an understanding of shifts in service delivery, quality, and equity.

ABOUT THE AUTHOR

Courtney Burke is senior fellow for health policy at the Rockefeller Institute of Government

[1] Dry powder refers to the amount of committed but unallocated capital a firm has on hand.