The impact of a financial pinch won’t be felt right away, so investors can use this narrow window to maximize efficiencies, integrate tech and hold onto growth businesses.
By Nate Birt
The typical three-year cycle of healthcare provider contracts with payers means the effects of inflation and a potential recession won’t be felt overnight. Yet higher healthcare prices for those stakeholders and the American public are on the horizon, meaning this narrow window of time is perfect for the healthcare finance community to make strategic decisions, says Aneesh Krishna, partner at McKinsey & Company’s Silicon Valley office leading all its work in pre- and post-acute care.
“While healthcare is not hitting the headlines that consumers are facing the pain, challenges are beginning to emerge, particularly on the provider side, and it is going to flow through,” Krishna says. “It’s just going to have a lag.”
Several factors suggest future price increases are certain in healthcare. The cost of hiring and retaining doctors and other medical workers has increased, and providers would like to pass on some of those added costs to payers, Krishna says. Payers, meanwhile, have generally said they won’t increase premiums above historical increases of 3% to 5%, on average — and even those increases they’ll pass on to employers or consumers.
Taken together, about a third of provider contracts renew annually, and with each passing year, anyone connected to the healthcare industry will start to see rate increases. Krishna points to a recent analysis of 72 marketplace insurers across 13 states and Washington, D.C. They reported a median increase of 10%, suggesting payers are filing “much higher” marketplace plans for 2023 than in previous years.
Krishna advises healthcare financial professionals to consider several steps to prepare for a multi-year period of inflation. Although McKinsey doesn’t predict or label recessions, he says, these kinds of proactive strategies can provide added security if economists announce a recession is underway.
These steps include:
Focus on productivity across healthcare organizations: This is a “huge lever that has not been fully tapped,” Krishna says. For example, find ways to let clinicians spend more of their time at the top of their license, practicing the medicine they’re qualified to provide rather than focusing on administrative tasks best automated or delegated. Evaluate workflows to determine whether additional efficiencies might be put into place. Focus on reinvention now, Krishna advises, versus waiting a year or two. That’s because as the general economy begins its recovery from inflation, the healthcare market will just be entering the throes of an inflationary period (due to the lag) and premiums will rise. “We’re encouraging folks to get ahead of it and take whatever action to reduce this lag,” he says.
Although it won’t hurt to assess suppliers and supply chain efficiencies, most healthcare organizations have captured part of the value here by adapting to earlier impacts from the coronavirus pandemic and war in Ukraine.
Exercise thoughtfulness when making investments: For those working in private equity, access to capital will be harder, and debt will be much more expensive than in the past, Krishna notes. McKinsey is hearing from many in private equity saying they’ll be more thoughtful about investments over the next 12 to 24 months.
Beyond new acquisitions, evaluate healthcare companies already in your portfolio. It’s likely more investors will decide to hold onto assets longer, focus on organic growth and exit two to three years from now when the market is more conducive. The overall market cap of the stock market and related indices have gone down in recent months. Investors “don’t want to exit the business with risk of being undervalued,” Krishna points out.
Integrate more technology and seek out investors to achieve greater scale: Finding more applications for technology inside of healthcare organizations can help companies grow even during inflation. Unlike businesses that rely on labor, technology solutions can be scaled broadly as an organization grows. For those working inside of healthcare startups, keep in mind that this could be a good time for investment. That’s because healthcare-specializing private equity firms that moved beyond their core markets over the past several years will return to their roots—and invest more in niche areas core to their approach. “If anyone is looking for investments, targeting those organizations I think would be good not only to get the capital and the eventual investment but to scale the business,” Krishna says.
Emphasize growth, even when it seems counterintuitive: Coming out of the 2008-9 recession, the top quintile of publicly traded companies that performed best exhibited a special kind of resilience. The traits of those businesses can be applied by healthcare finance professionals today, Krishna says. For example, as the downturn began they divested in assets they didn’t need while making opportunistic acquisitions. They also secured their balance sheets ahead of a possible recession. Then, they moved “really fast” at improvements in clinical and administrative operating costs. Rather than cutting back on sales and growth, they continued to focus on growth. Krishna notes that organizations faced with inflation and recession often do the opposite, which makes bouncing back harder as the general economy improves. Organizations that think differently get the “benefits of leaner costs and captured growth,” he says.
Whether a recession will occur remains unclear, says Mahmud Hassan, a health care finance expert and professor in the department of finance and economics at Rutgers University. Yet it’s an ideal time to focus on risk management.
“I don’t think this is going to go away quickly,” says Hassan, adding that in his view, the months ahead might unfold as “a kind of nagging recession for a long, long time.”
Health care finance professionals should apply a golden rule of investing. “Don’t put all your eggs in one basket,” Hassan says.
Unlike other points in history in which financial factors led to a recession, the current period represents a new set of circumstances that make recession especially difficult to forecast.
“This is a very complex scenario. Had it been only financial things, it would have been easier to predict,” Hassan says. “But now there’s financial plus the war.”
The ongoing conflict between Russia and Ukraine—and its follow-on effects in markets including energy, foreign exchange and international trade—could spill over into other parts of the economy. Much of that depends on how long war continues. Other macroeconomic factors that could influence a possible recession include the outcome of the mid-term elections in the U.S. and whether strong demand for the dollar persists worldwide.
Finance professionals in health care should navigate such choppy waters by thinking about strategies to diversify revenue streams, Hassan says. For example, integrating technology into medical practices not only adds efficiency but also positions providers to capitalize on higher government reimbursements for medical services provided with new technology. What’s more, the current environment could incentivize physicians to expand or add specialties aided by innovation.
In the process, they might also achieve a better quality of life in an industry where doctors, nurses and others suffer from high rates of burnout.
“Technology is one way that providers are trying to focus their business from traditional services to specialized services to minimize their role of man hours,” Hassan says.
The best equipped healthcare finance organizations will recognize the winds of change are blowing and steer their businesses to weather the environment with an eye toward growth—and implement a strategy to position themselves for long-term success, personally and professionally.
