Two years of the COVID-19 pandemic have shifted the dynamics in the US healthcare value chain. The years from 2020 through 2021 were challenging for payers and providers. At the same time, innovation and growth continued unabated in services. Prospects over the next few years seem favorable, although persistent inflation in consumer prices could dent the outlook. Recovery in profitability partly explains this positive outlook. Another reason for optimism is the potential for scaling up innovation that was prompted by pressure the pandemic put on the healthcare system. Also, acceleration of value-based care models and increasing application of technology across the healthcare industry are likely to continue in the long term.
Variability in growth across different parts of healthcare persists and, in some cases, has become more pronounced. For example, government lines of business continue to account for the largest growth areas for payers. Care-delivery services outside the hospital are the fastest growing businesses for providers, given the continued shift to the non-acute setting. Meantime, the progression of value-based care and related risk payments as well as digitization of the value chain is shifting value creation across, rather than within, traditional healthcare subsectors.
The marketplace has begun to address the patient’s full health journey, leading to improved affordability, quality, access, and experience.
Many players, spurred by significant investment, are innovating their business models to create value and capture some of it in enhanced margins. In this article, we will review the shifts in healthcare profit pools, look ahead to how they might evolve, and examine how the pandemic has stimulated changes in industry business models.
Shifts in profit pools continue to accelerate
Healthcare industry EBITDA grew 5 percent pre-COVID-19 (between 2017 and 2019) and remained flat over 2020 and 2021. We estimate post-COVID-19 (between 2021 and 2025) growth at 6 percent (Exhibit 1). If the industry achieves this rate of growth, it could add about $31 billion in profits
between 2021 and 2025. We have not factored in the potential impact from macroeconomic headwinds, including persistent consumer inflation, in these estimates; profits could decline by more than $70 billion during this period if inflation continues unchecked.
The post-2021 recovery and shifts in profit pools are likely to be driven by several factors, including the following.
Evolving payer mix
Payer profit pools are expected to shift substantially toward government segments, led by the growth in the over-65 population and popularity of Medicare Advantage over traditional fee-for-service Medicare. Further, as the economy recovers from the impact of COVID-19, we estimate that payers’ mix of business could shift from Medicaid to commercial (the share of commercial lives