The trend of transformation that characterized the healthcare industry in 2023 is likely to persist in 2024, as macroeconomic headwinds continue to swirl.
“We’re looking at another challenging year ahead, but businesses have been operating in this environment for a while now and are finding approaches to adapt,” said Brian Kelly, head of PNC Healthcare. “That being the case, PNC would characterize the outlook for healthcare in 2024 as neutral, as the industry continues to contend with these ongoing challenges.”
In Kelly’s view, there are three key trends that are likely to affect performance of the various healthcare industry sub-sectors in 2024:
- Artificial Intelligence (AI) – AI continues to reshape the healthcare landscape, and this is likely to intensify as businesses continue to explore where they can deploy it effectively both in clinical care and in an effort to realize cost savings. Private equity firms are increasingly looking to invest in AI technology, in both business and clinical processes.
- High Interest Rate Environment – If the Federal Reserve continues to raise interest rates or maintains them at their current level, a higher for longer rate environment, or even one that reverts back to the historical mean, will impact cost structures. Businesses looking to realize cost savings will not be able to do so via their interest rate expense, which is likely to go up if it has not done so already, as organizations look to refinance capital procured in a previous era of lower interest rates and a more normalized rate environment.
- Managing Profitability – With cost structures remaining high, businesses will generally continue to face challenges in managing profitability, especially with current labor movement trends. There will continue to be negative consequences for companies’ expense structures and profitability, as revenues will continue to be suppressed across all industry sub-segments.
The trend toward consolidation in the not-for-profit acute care space is likely to continue and possibly accelerate in 2024 due to continued labor challenges, in a sub-sector of healthcare where 1% operating margins are looked at as a “healthy” organization. The growing empowerment of the labor union movement in healthcare will likely continue to exacerbate financial cost structure challenges, as will ongoing efforts to advocate for federal legislation around higher nurse-to-patient ratios, which will stress staffing levels given resource shortages.
As a result of rising labor costs, acute care entities are likely to look for opportunities to drive cost efficiencies, which may lead to increased merger and acquisition activity in this sub-sector. Higher compensation and increased nurse-to-patient ratios will drive up the cost of healthcare, which may lead acute care entities to conclude that the only solution left to ensure profitability and sustainability of their services is to seek partners or larger providers in order to drive economies of scale in other areas of the business.
Pharmaceutical and Life Sciences (PLS)
A number of pending and enacted regulatory changes are creating headwinds across the PLS industry, which may impact profitability heading into 2024.
- Inflation Reduction Act (IRA) – Pharmaceutical companies continue to encounter challenges stemming from the Inflation Reduction Act, which has given Medicare increased leverage in negotiating drug pricing. The pharmaceutical industry has opposed the passage of the law, and several companies and lobbying groups have filed lawsuits in an effort to overturn the legislation or limit its impact.
- Mergers and Acquisitions (M&A) – The Federal Trade Commission and Department of Justice have proposed updates to U.S. merger guidelines that could affect regulation of consolidation in the healthcare industry. If guidelines are finalized, vertical and cross-market mergers will not be allowed to create anticompetitive market structures, and regulators will be able to examine vertical mergers even if they are below 50% market share.
- Pharmacy Benefit Managers (PBM) – Lawmakers have proposed federal legislation to investigate PBM business practices around pricing transparency. PBMs, which help administer prescription drug insurance benefits by negotiating prices with drug manufacturers and pharmacies and establishing drug formularies and pharmacy networks, are under scrutiny, given the level of concentration of their services (with three PBM firms controlling the majority of the market) and vertical integration with insurers and pharmacies.
- Lab Regulation – The Food and Drug Administration (FDA) has proposed regulations that would bring laboratory-developed tests under the agency’s purview. These tests were previously exempted from some regulatory requirements, but FDA is now making efforts to include all tests under one regulatory framework.
- Sterilization Technologies – Increased Environmental Protection Agency (EPA) standards may require transitioning away from the use of ethylene oxide (eto) to new sterilization technologies. The industry has concerns about the EPA’s proposed timeline and emissions targets.
Tuck-in acquisitions (in which a large entity completely absorbs a smaller one) will continue to play a role in the insurance sub-sector, as insurers look for ways to manage member cost. Insurers are likely to remain focused on pursuing home health businesses for acquisition opportunities, as they have identified this sector as one that can have an impact in driving down healthcare costs. Regular home visits from medical professionals can help drive a higher level of patient compliance with doctors’ medication and care instructions, which in turn can help reduce the need for hospital visits and costly procedures. Additionally, with future federal budgetary constraints, Medicare reimbursements rate pressures are likely to continue impacting smaller providers and further driving rationalization for scale in the market.
Emerging Trends and Markets in Corporate Healthcare
Healthcare is being reshaped as new entrants disrupt business models, corporate retailers enter the ecosystem, and healthcare professionals search for new ways to improve the impact and efficiency of care delivery. Throughout 2023, the industry has contended with labor issues, including workforce shortages and strikes, and government regulation. These challenges will continue to influence the industry in 2024, along with several other themes:
- Continued M&A Activity – Despite increased scrutiny of M&A transactions within healthcare, consolation continues to increase. Health system mergers are occurring for a number of reasons, including the survival of distressed entities, achieving back-office efficiencies, increasing scale in order to better negotiate with payors, and the ongoing pursuit of value-based care.
- Private Capital Liquidity and Exit Opportunities – While private capital transactions may be on the decline in healthcare, private equity (PE) transactions continue to proliferate, particularly within the provider services arena. How this continues to play out in 2024 will depend on the manner in which PE firms handle their remaining funds to invest, how they conduct exits, and if acquirers move forward. Throughout 2024, unconventional buyers, primarily from the retail space and other Fortune 100 companies, are expected to promote private capital exits.
Small Business Healthcare
In 2024, patient-centered healthcare delivery will continue to leverage Small Independent Practices (SIPs). These practices continue to evolve in how they deliver cost-effective, high-quality healthcare.
Given technological advances in remote monitoring and wearable devices, telemedicine will become even more prevalent, making it easier for patients to access medical care and proactively manage risks associated with chronic conditions from their own homes. This may result in physician practices being able to provide more efficient and personalized approaches to the care of their patients, concentrating their resources on patients with advanced needs.
Technological advances will also continue to spread across healthcare diagnostic and practice management/electronic health record platforms, making augmented and artificial intelligence available to SIPs to improve patient outcomes and reduce administrative burdens. Overall, small, independent healthcare practices will continue to play an important role in delivering quality care by embracing and investing in technology to meet evolving patient needs and expectations.
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PNC can help develop strategies and solutions for growth and stability for organizations in all segments of the healthcare industry. For more information, reach out to your PNC Relationship Manager, or contact us.