Top Areas of Focus in 2022

The events of the past two years have put significant financial and operational strain on the healthcare industry. Moving into 2022, we are providing the industry with insight into how the banking sector and investor community view the evolving healthcare landscape and evaluate the significant changes occurring in the industry. As one of the nation’s largest lenders to the healthcare industry, we will share some of the key factors to which we are paying attention as the industry continues to address challenges and opportunities playing out in real time. Specifically, these changes relate to areas of particular interest to both banks and institutional investment managers as they think about capital, operations, and asset management considerations/options. New regulations, competition, and technological advancements are altering the healthcare sector in ways never before imagined, and are creating dramatic shifts in how healthcare companies provide care, manage risk, and allocate capital. Looking at the year ahead, we believe these eight themes, while not exhaustive, represent topics of particular importance that will need to be focal points for organizations to be successful in an ever-evolving industry.

  1. Competition in an evolving healthcare landscape
  2. Impact of COVID-19
  3. Asset optimization/management
  4. Environmental, Social, and Governance (ESG) impacts
  5. Alternative capital’s role in healthcare
  6. Mergers & acquisitions
  7. Cybersecurity
  8. Federal government’s influence on healthcare

These variables form the key inputs for how PNC’s banking and investment management teams are working to understand the industry holistically and providing value-add services and advice. In this article, we will share the perspectives of PNC’s banking and investment management professionals on these topics.

1) Competition in an evolving healthcare landscape

“Controlling rising healthcare costs” shows up everywhere from campaign slogans to board room discussions. While the idea is not new, we are seeing new and evolving attempts by a multitude of influencers, like payers (e.g., insurance companies) healthcare subsidizers (e.g., companies providing subsidized healthcare to their employees), and new entrants (e.g., private equity and venture capital firms) to interject their influence to achieve this goal. These efforts are blurring the lines of what constitutes a healthcare provider, as consumers are presented with more options for alternative care.

Healthcare insurers are taking the lead: Some organizations are vertically integrating into the provision of care business to mitigate the “middleman.” Humana’s acquisition of Kindred was a large-scale example of this playing out in real time. A Humana press report cited creating “a payer-agnostic value based operating model” with a “focus on improving patient outcomes and reducing the total cost of care.”[1]

Highmark Health’s acquisition of Allegheny Health Network has proven to be valuable to the organization’s members, helping to ensure a competitive landscape for providers and offering options for the community.

Employers are taking notice: On the “healthcare subsidizer” side, companies are trying to limit costs by creating wellness options for employees and delivering in-house telehealth systems which come at a lower cost and create more flexibility for employees. Some companies have banded together with peers to increase purchasing power in negotiations with insurers. Walmart, for example, is doing all of the above and more, even standing up their own clinics. We expect larger companies to continue these trends in order to further manage costs.

Healthtech is driving change: Alternative, “lower cost” care options continue to see interest and investment, recently evidenced by Walgreens’ additional investment in the technology-enabled, value-based primary care provider, VillageMD. The impetus for Walgreens’ growing support is the desire to create an integrated primary care and pharmacy model, providing both better value and access to care. Telehealth, in particular, has received strong levels of private equity and venture capital support in the wake of the pandemic. Growing use of telemedicine platforms, as well as an increase in other technological advances, such as remote patient monitoring tools, are just two of the many options for care garnering interest outside of traditional brick-and-mortar offices and hospitals.

We are monitoring the operational impact a focus on cost containment might have on the overall costs of healthcare and patient volume, especially for standalone healthcare systems, which traditionally rely on volume for revenues. These factors are likely to affect systems across the provider continuum. They could have a long-term impact on profitability, balance sheet strength, and creditworthiness of smaller provider organizations, if they are unable to address the asset intensive nature of their businesses in a more agile environment with other viable options such as shifting to telehealth formats or merging with other health systems. We are viewing these new ventures as opportunities for both innovation and alignment, where technological advances in banking tools may help support transformation, and value creation, as healthcare organizations seek partners to help them through inevitable industry change.

2) Impact of COVID-19

While the healthcare industry has largely recovered from the initial shock of the pandemic, it is important to acknowledge the “long-haul” effects yet to come. According to McKinsey, the lingering impact related to COVID-19 could cost the healthcare industry an estimated $125 billion to $200 billion in incremental annual cost.[2]

Infectious disease protocols, and the expenses necessary to support them, will continue to evolve. Healthcare providers may need to continue allocating considerable resources — treating COVID-19 patients beyond the near-term, all while clinical employees are facing burnout. This may prove to be an underestimated challenge as one of the most critical resources a healthcare system has, its workforce, faces continued staffing shortages. Further, organizations may find themselves under external pressure from insurers based on coverage changes for COVID-19 care. [3]

These considerations all carry significant implications for the already thin profit margins of healthcare organizations, as well for the efficiency of their revenue cycles. Our viewpoint is healthcare organizations will need to address the following to mitigate the negative impact of these trends:

Accelerating cost transformation: Identifying the potential lasting impacts of the pandemic and quantifying the costs and investments necessary to adapt to these long-term effects will be pivotal. Organizations need to rationalize their real property needs and costs in light of the potential permanence of work-from-home models; we see the potential to monetize these assets and re-allocate resources as work-from-home models may become more prevalent for non-front-line staff. Organizations will also need to explore options for automation where possible. One example includes digitalizing the billing collection and payment posting process to reduce the need for lower-paid, non-clinical personnel resources who have more employment options as a result of growing minimum wage.

Creating a competitive advantage to be an employer of choice: Consider providing additional flexibility in how non-frontline workers operate on a day-to-day basis, such as allowing for additional remote work. Healthcare organizations may also benefit from conversations with existing vendors, who may offer additional employee-friendly services that don’t come with an additional cost.

3) Asset optimization/management

Healthcare organizations have faced a myriad of investment challenges and opportunities brought on by the pandemic. As the world adapts to the “new normal” and the government looks to ease the level of support provided throughout the pandemic, key asset management considerations include:

Managing cash effectively: Due in part to stimulus funding, balance sheets have swollen with cash. This, coupled with the drastically low interest rate environment, has created challenges for organizations seeking to maximize return on investment from these assets. We believe it is critical to assess plans for unrestricted cash as the Federal Reserve begins tapering asset purchases and interest rates begin to rise. With rising rates on the horizon, it is integral that healthcare systems pay careful attention to the duration profile of operating liquidity pools.

Consider strategic moves for defined benefit plans: Pension plans may see a bump in funding status as interest rates rise. Pension liabilities typically decrease with rising rates, as higher discount rates reduce the present value of pension benefit obligations, relative to the value of plan assets. We believe it is important for healthcare systems to take advantage of this opportunity to lock in funded status improvements by shifting to a higher proportion of liability hedging assets, such as long duration bonds.

Internal versus external investment management: Healthcare organizations have experienced asset growth in their investment portfolios over the past 5 years; many have also expanded their portfolios to more esoteric asset classes. This growth in size and complexity has raised the question of building in-house investment staff versus using external resources such as Outsourced Chief Investment Officer (OCIO) Solutions and consultants. While there is not a one-size fits all approach, many of the healthcare organizations with whom we work at PNC believe they are not adequately staffed internally to independently oversee their investment portfolios, which has led to more outsourcing. Regardless of an organization’s size, a key focus is on enterprise risk and operations, which may have already required additional human resources or outsourcing. When considering whether internal or external management better supports your organization, consider the complexity of the asset allocation (e.g. who has the skill to evaluate more complex investments, including Alternatives?), objectives of each asset pool (e.g. operating assets versus the assets of a defined benefit plan), and associated costs of each option.

The coming years will bring challenge and change for healthcare systems looking to manage their assets effectively.

4) Environmental, Social, and Governance (ESG) impacts

The industry’s focus on the environmental and social impacts of their efforts has never been greater. We expect continued interest in this topic heading into 2022, thanks in part to the emphasis that industry stakeholders, including investors, are placing on social impacts. Healthcare organizations can take this opportunity to enhance the messaging and effectiveness of their own ESG initiatives by utilizing both sides of the balance sheet, including through sustainable financing and intentional investment policies for their investment assets.

Liability focus: Sustainable finance borrowing has experienced a 49% CAGR since 2012, growing from $31bn in 2012 to over $750bn in 2020.[4]

The impetus for this growth is attributable to a multitude of factors. First, sustainable financing is a way for an organization to insulate itself from undue risks associated with the general course of doing business. For example, a hospital looking to issue green bonds to fund a new LEED-certified building may be protecting itself from the negative environmental ramifications associated with constructing and maintaining a less environmentally friendly building. An additional reason for the growth in green financing is increased investor interest. Should a healthcare organization issue debt geared toward furthering its own sustainable mission and values, that may resonate with investors, creating what could be a more attractive investment as a result. This, in turn, could create more demand from the investing community which may, over time, lead to lower costs of issuance for the borrowers committed to those efforts.

Asset focus: Looking at the other side of the balance sheet, we see the shift towards responsible investing as another consideration for healthcare organizations heading into 2022. Assets under management in responsible investing strategies have grown from $12 trillion in 2018 to $17.1 trillion in 2020.[5]

We see organizations shifting away from exclusionary screening of investments toward positively allocating more dollars to investments that further their same missions and values.

To read more, see our article titled Sustainable Financing: How It’s Influencing Issuers and Investors.

5) Alternative capital (Venture Capital’s (“VCs”) and Private Equity’s (“PEGs”)) role in healthcare

Venture capital and private equity investors have become critical players in the financing and management of healthcare organizations throughout the country. The very definition of “healthcare” is changing due to the influx of investment into innovation in healthcare-related products and services. Over the last decade, private equity investment in healthcare has soared from just over $41bn in 2010 to almost $120bn in 2019.[6]

One catalyst for this immense growth is healthcare’s tendency to lag in the automation and digitization[7] of business processes, given that most innovation in healthcare is in clinical solutions. But challenges stemming from the lack of historical focus and investment in the business model are attracting investments designed to eliminate those inefficiencies:

Stakeholders are taking notice: Because healthcare companies have historically been slow to adapt, they provide ideal investment opportunities for private equity investors who look to drive operational efficiencies. According to a report from McKinsey,[8] healthcare’s massive range of stakeholders and regulations are the reason for this lag in implementation. However, the same report notes that this lag will need to be addressed in order to match the demands of increasing regulatory complexity, the increased demand for efficiency in patient experience, and higher productivity demands being placed on the healthcare industry as a whole.

Telehealth is the current beneficiary: An example of innovative digital investment is telehealth. Healthcare providers have begun reaping the cost and efficiency benefits of implementing this technology and benefits both the organization and other stakeholders.

Other sub-segments generating PEG interest: For additional information on other healthcare sub-segments generating considerable PEG interest see this industry update published by our partners at Harris Williams.

While stakeholders are taking notice, and telehealth is the current hot topic, we view the trends of increased consumerism, digitization, and alternative care models in healthcare as attractive to VCs, PEGs, and other healthcare organizations looking to outshine their competition. Quality of information, data, and care delivered to patients should improve as the result of faster and more precise decision support capabilities and corresponding organizational efficiency.

6) Mergers & Acquisitions (M&A) are changing healthcare

For healthcare organizations, 2021 was a year marked again by consolidation across the industry. A PwC report[9] tracking deals over the trailing 12 months through May 15, 2021 counted 1304 deals representing $129 billion in transaction value. With private equity companies flush with dry powder and corporations sitting on significant balance sheet cash, we expect acquisition activity to continue throughout 2022, but potentially at levels lagging 2017’s banner year – due in part to increased regulatory scrutiny.

Federal Trade Commission (FTC)’s pre-approval requirements: The FTC recently voted to rescind the 1995 Policy Statement on Prior Approval and Prior Notice Provisions, effectively restoring the practice of requiring companies that pursued an anticompetitive merger in the past to get approval prior to future transactions. According to Becker’s Hospital Review,[10] there are multiple implications worth considering. The FTC’s requirement for pre-approval covers each directly affected market where “harm is alleged to occur, for a minimum of ten years.” Additionally, the FTC stated that in certain instances, it may even require pre-approval in geographic markets beyond those directly affected by the M&A transaction. For organizations wishing to avoid prior approval provisions, the FTC has stated they are less likely to seek prior approval for those willing to abandon their merger. The impetus being “it is more beneficial to [the merging parties] to abandon an anticompetitive transaction before the Commission staff has to expend significant resources investigating the matter.”[11]

For a complete summary of considerations, see the aforementioned article by Becker’s. The FTC’s announcement has the potential to impact organizations’ planned growth strategy (organic vs. inorganic), how they organize their capital structures, and how they finance future strategic initiatives.

For organizations weighing merger and acquisition related activity, we strongly advise them to consider how transactions may carry unforeseen implications – including when assessing the impression that any increased organizational complexity may have on third party stakeholders.

M&A motivation/drivers vary widely: As consolidation takes place across the healthcare industry, it may result in more streamlined models of both care and of conducting business. Insurers becoming providers, investment in telehealth, shrinking physical footprints, and healthtech addressing business process inefficiencies are just a few examples of how M&A activity may have impacts on an organization’s ability to provide care, and carry over to its bottom line as well. It is important, however, to take inventory of the increasing complexity this consolidation may create. To a financier, it is important to have a thorough understanding of a borrower’s operations; this is critical for a borrower engaged in M&A, especially if they intend to seek additional financing in the future.

Capital is widely available: Another consideration for borrowers engaged in M&A is how their reliance on debt financing may impact their credit profile, potentially increasing their cost of debt and hindering their ability to engage in future M&A. Debt issuance may also be limited by existing lender covenants that set a restriction on the amount of debt an organization can assume, or which are more restrictive than covenants governed by an issuer’s Master Trust Indenture. This might make it impossible for some companies to borrow sufficient debt to make a large acquisition as planned. We see traditional lender capital being de-prioritized as venture capital and private equity are entering and providing untapped resources for organizations to evaluate as an option.

Historic liabilities can make a deal more difficult: Retirement plans also carry implications worth considering when undertaking a merger or acquisition.

  • For defined benefit plans: It is imperative to take note not only of balance sheet liabilities, but also the actuarial assumptions underpinning the reported liabilities. For healthcare organizations on the cusp of a credit rating evaluation, the variability of the liabilities and plan contributions can sometimes be enough to prevent an upgrade or cause a downgrade. This uncertainty, in our opinion, characterizes the lack of retirement asset planning as a considerable risk.

  • For defined contribution plans: We recommend determining if and how the target’s plans can be consolidated into the acquirer’s existing retirement plan structures. This is especially relevant for target organizations with defined contribution plan structures (benefits) that are significantly different from what the acquiring organization offers, given that unique structures don’t often integrate (consolidate) well, if at all.

Despite high valuations going into 2022, the health services industry remains an attractive target of M&A activity. We expect to see continued activity against this backdrop of investor interest coupled with healthcare systems looking to deploy balance sheet capital, build economies of scale, and/or leverage operational synergies.

7) Cybersecurity

While large, corporate data breaches often make the news, small businesses, nonprofits, higher education institutions, healthcare systems, and other institutions are an increasingly attractive target of cyberattacks. Global losses from cybercrime now total over $1 trillion, according to a December 2020 McAfee Report.

While large corporations typically have the budget to maintain cutting-edge technology and dedicate entire departments to security, criminals preying on smaller institutions, such as healthcare systems, hope to exploit their perceived limited resources for cyber safety.

A successful cyberattack has far-reaching implications for healthcare systems large or small, for-profit or not-for-profit. A breach harms an institution’s reputation and deters partners, employees, donors, volunteers, and other associates from working with the organization. An institution’s most sensitive asset is its data, and it is the institution’s responsibility to protect it. Financial ramifications for not doing so can be significant.

Unfortunately, there is no single, impenetrable solution to make an institution cybersafe. Cybercriminals continuously find new ways to cause damage, but a commitment to ongoing education and working with well capitalized tech/financial third-party vendors/ partners with resources to help prevent breaches are integral practices for an institution to protect its data. Going forward, we expect cybersecurity policies and procedures to be a topic of discussion and interest to investors as capital sources evaluate where to invest their dollars. A demonstrable commitment to cybersecurity could be a differentiator for attracting investment dollars versus the competition. For more information on cyber hygiene, please see our article Best Practices for Institutional Cybersecurity.

8) Federal government’s influence on healthcare

It is impossible to ignore the federal government’s influence on healthcare. While the industry has traditionally been able to adapt to government policies and procedures - and we would never recommend making a decision based on the “potential” impacts from federal policies - we do expect some impact from federal policies that organizations should be prepared to address as they evaluate strategies and growth opportunities through 2022. There are three key issues where pending or contemplated legislation may have an impact on “business as usual.” Both investors and the banking community will be interested in understanding how the organizations plan to address:

Price transparency: The price of healthcare is a hot button issue for the voting population and low-hanging fruit for politicians to target in speeches and legislation. For the industry and its largest drivers, impacts of price transparency rules have been minimized due to the lack of “teeth” in any current legislation or executive order, however it is a looming consideration should the penalties become meaningful. Recent examples include penalties for hospitals that do not publish their prices publicly, with some proposals in 2021 suggesting increasing the maximum annual penalty for noncompliance from $109,000 to as much as $2 million a year for large hospitals.[12]

We expect this trend to continue for the foreseeable future. It would carry a potentially negative impact on future profit margins as providers lose their leverage over insurers once their rates are public knowledge. It would create a “race to the bottom” for rates for the most common procedures. While this may prove to be a good thing for patients, it would likely be a negative for hospitals that rely on their commercial contracts to subsidize the below cost reimbursements they receive from Medicare and Medicaid.

Expansion of Medicare / Medicaid: Continued expansion of Medicare could create the potential for significant provider issues down the road that are worth considering. If market share shifts away from commercial insurance to Medicare and Medicaid, we would expect a negative impact on healthcare providers’ financial performance, given the aforementioned lower reimbursement rates. Due to the historical healthcare ecosystem, most providers around the country do not have a cost structure in place that could sustain a material shift from commercial reimbursement rates to Medicare/Medicaid reimbursement rates. Downstream impacts of a shift could potentially be further consolidation to address the cost efficiency needed, or reduction of traditional physical infrastructure, which may have the unintended consequence of reducing access to services in the near-term.

Other government actions that could impact enterprise financial management: Beyond the recent action taken by the FTC discussed previously, the most obvious example of government action impacting healthcare is the Fed’s tapering of bond purchases. This creates the potential for a rising interest rate environment, driving up borrowing costs and potentially impacting the funded status of defined benefit plans. Increasing tax rates also appears to be on the horizon, though the immediate impact to the healthcare landscape is more difficult to glean. Higher corporate tax rates may be negative for for-profit margins. However, higher marginal tax rates may be positive for issuers selling tax-exempt debt (e.g., increased investor demand in a higher tax environment may drive down borrowing costs).

It is difficult to predict if much legislation will pass ahead of the coming mid-term elections in 2022, but it is nevertheless important for healthcare systems to consider the influence of potential government actions during their strategic planning process, as investors and other capital providers are assessing the same.


The healthcare industry is coming off of two years of operational and financial difficulty brought on by the challenges associated with COVID-19. As healthcare organizations are starting to shift their focus from mitigating the impact of COVID-19 to recovering and rebuilding enterprise financial strength, we will be closely following the aforementioned topics as work to help our clients navigate the changes ahead. We welcome the opportunity to discuss these topics and more with your organization. For more information, please reach out to your PNC representative.

Let's Talk

Our solutions can be tailored to meet your unique needs.

Contact Us »

PNC Healthcare's Outlook 2022