Expected Advances in the U.S. Healthcare System for 2024 and Beyond

 

Expected Advances in the U.S. Healthcare System for 2024 and Beyond

A fresh analytical perspective examines the impact of technology, transformation efforts, and other changes on key stakeholders. These stakeholders include institutions that cover healthcare costs by reimbursing service providers, such as health insurance companies, government agencies, employers, healthcare systems, and pharmaceutical services.

In the past two years, efforts by healthcare providers have significantly improved the financial health of the industry as of 2022. The acute pressures from labor shortages, inflation, and the COVID-19 pandemic have been alleviated, largely due to transformative initiatives led by major players in the healthcare sector, alongside newer entrants. Despite this, the profit margins of healthcare systems remain lagging compared to pre-pandemic levels. Particularly, the profits from premium nursing and long-term care services are still declining. Moreover, strong economic reevaluations have negatively impacted the financial performance of Medicaid, the federally supported state insurance program for low-income families. Conversely, sectors like individual healthcare services and Medicare Advantage, a private insurance-based healthcare guarantee system approved by the Federal Center for Medicare Services, have demonstrated resilience for healthcare payers.

Looking ahead to 2027, the growing number of individuals eligible for Medicaid and Medicare presents a significant opportunity for healthcare payers and service providers. Financial performance in healthcare is expected to continue improving, driven by ongoing transformation efforts, mergers and acquisitions, and revenue diversification, all of which are anticipated to be fruitful. Additionally, companies specializing in healthcare services and technology are likely to sustain their growth, largely due to their adoption of advanced technologies. This is particularly true for those offering measurable enhancements to their clients, including specialized pharmaceutical services.

In this article, we provide an overview and analysis of how these transformations and changes are impacting payers, healthcare systems, healthcare services and technology, and pharmaceutical services, along with what can be anticipated for 2024 and beyond.

The fastest growth in healthcare can be expected across several sectors.

The healthcare sector is projected to experience a compound annual growth rate (CAGR) of 7%, with revenues expected to rise from $583 billion in 2022 to $819 billion by 2027. Despite facing challenges in 2023, such as labor shortages and inflation, the sector is anticipated to begin a recovery phase in 2024. This recovery will be driven by improved profit margins, effective cost management, and increased reimbursement rates.

Sectors likely to see growth in profit margins include:

• The payer sector is set for significant growth, with Medicare Advantage leading the charge due to the rapid increase in beneficiaries with dual health coverage. Additionally, business groups are expected to see growth as profit margins recover post-COVID-19, alongside individual segments.

• Healthcare systems have undergone major shifts, especially in outpatient care environments such as doctor's clinics and mobile surgical centers.

• The healthcare services and technology sector, which encompasses software and platforms focused on patient interaction and clinical decision support, is set for significant growth.

• The pharmaceutical services sector, particularly specialized pharmacy services, is expected to experience robust growth. In contrast, some areas of healthcare will continue to see slower growth rates, including emergency care, post-acute care, and the Medicaid program within the payer sector.

Several factors are expected to influence profit margins in the healthcare sector. Two of these factors are:

1. Changes in the Payer Mix: The rate of enrollment in healthcare programs is anticipated to increase, particularly among individuals eligible for both Medicare and Medicaid. While enrollment growth between 2019 and 2022 was 9% annually, it is expected to slow to 5% annually from 2022 to 2027, according to recent data from Medicare and Medicaid services. Notably, enrollment for those with dual eligibility is projected to grow at a compound annual growth rate exceeding 9% during this period.

2. Commercial Sector Profit Margins: The commercial sector is likely to see a rise in profit margins, with operational profitability before interest, taxes, depreciation, and amortization expected to return to historical averages by 2027. This growth may be partially offset by shifts in enrollment patterns as companies move from fully insured to self-insured models, a transition that could accelerate if employers seek to reduce costs in response to economic slowdowns. Additionally, profit margins in the individual market are projected to grow at a compound annual rate of 27% from 2022 to 2027, driven by improvements in incentive programs and the reassessment of Medicaid. Expected gains include increased enrollment due to the Affordable Care Act's cost-sharing provisions. Operational profit margins are forecasted to improve from 2% in 2022 to between 5% and 7% by 2027. Conversely, individual Medicaid enrollment could decline by approximately ten million over the next five years, influenced by recent legislation allowing states to re-evaluate eligibility criteria that were suspended during the federal public health emergency at the onset of the COVID-19 pandemic.

Value-Based Care Models Growth: It is estimated that the number of individuals covered by value-based care models will reach 90 million by 2027, up from 43 million in 2022. This increase is expected to drive further adoption of value-based care models and expand programs such as Medicare Advantage and integrated care for Medicare beneficiaries. Significant growth is also anticipated in specialized areas like orthopedic surgery and nephrology, with growth rates potentially doubling over the next five years.

Value-based care models are undergoing changes due to updates in risk assessment methodologies by central healthcare services. As these models expand to include specialties beyond primary care—such as nephrology, oncology, and orthopedics—further growth and improved cost and quality outcomes are expected. The shift towards value-based care is likely to enhance profit margins in healthcare services by transitioning care from critical settings to other venues like outpatient surgical centers, physician offices, and home healthcare services.

Payers of Healthcare Costs: Government payments are projected to exceed those of the commercial sector by 65% by 2027.

In 2022, total profits for healthcare payers amounted to $60 billion. Looking ahead, we anticipate that operating profit before interest, taxes, depreciation, and amortization (EBITDA) will reach $78 billion by 2027, reflecting a compound annual growth rate (CAGR) of 5%, as the market recovers and approaches its historical growth rates. Various factors are expected to positively influence this growth, including the recovery of commercial sector profit margins, increased supplementary premium rates due to inflation, and greater enrollment in dual-eligible programs. However, this growth may be partially offset by narrower profit margins in Medicare Advantage due to regulatory pressures (such as risk adjustment, decreased performance bonuses, and technological updates) and a potential reduction in Medicaid enrollment as the public health emergency ends.

We project that rising labor and administrative costs will decrease the operating profit margin of healthcare payers by approximately 60 basis points in 2023. Furthermore, healthcare systems are likely to seek higher reimbursement rates, with expected increases ranging from 350 to 400 basis points in the commercial sector and 200 to 250 basis points in the government sector from 2023 to 2027, based on McKinsey’s analyses and discussions with external experts.

The stimates also suggest a notable shift in profit contributions toward the government sector. By 2027, profits from this sector are expected to be approximately 65% higher than those from the commercial sector, translating to $36 billion compared to $21 billion. This shift will be driven by the growth in Medicare Advantage, which is projected to increase by 52% by 2027, alongside continued expansion in dual-eligible programs, expanding operating profit before interest, taxes, depreciation, and amortization from $7 billion in 2022 to $12 billion by 2027.

 The profits for the commercial sector decreased from $18 billion in 2019 to $15 billion in 2022. However, we expect operating profit margins before interest, taxes, depreciation, and amortization (EBITDA) to return to historical levels by 2027, with profits anticipated to rise to $21 billion, reflecting a compound annual growth rate (CAGR) of 7% from 2022 to 2027. Within this sector, a shift from full-coverage insurance companies to self-insured entities may accelerate due to economic slowdown, leading employers to consider cost reduction strategies more seriously. This shift could result in a decline in full-coverage insurance enrollment from 50 million in 2022 to 46 million by 2027, while self-insured enrollment might increase from 108 million to 113 million over the same period.

Healthcare Systems: Transformation Efforts Accelerate Recovery of Operating Profit Margins

In 2023, healthcare systems continued to face significant challenges due to the ongoing effects of inflation and labor shortages. Expected growth rates remained below 5% from 2022 to 2023, falling short of pre-pandemic levels. In response, healthcare systems implemented substantial transformation efforts and cost management strategies, particularly in workforce management. These measures contributed to a recovery in operating profit margins before interest, taxes, depreciation, and amortization (EBITDA), with an improvement of up to 100 basis points. Part of this recovery was driven by an increase in service volumes.

Looking ahead, we project a compound annual growth rate of 11% from 2023 to 2027, with operating profit before interest, taxes, depreciation, and amortization (EBITDA) expected to reach $366 billion by 2027. This reflects a recovery, though at levels slightly below the long-term historical average, largely driven by transformation efforts and a potential increase in reimbursement rates. Healthcare systems are also expected to push for significant increases in reimbursement rates during contract renewals, potentially exceeding 300 basis points above previous levels, in response to recent cost inflation.

To address rising costs, several strategies must be implemented, including improving overall labor productivity, leveraging innovative technology applications in administrative tasks, and enhancing care delivery. Examples of these strategies include establishing a unified system for operations and outsourcing, increasing the use of digital technology in care delivery, and adopting AI technologies early in administrative processes like revenue cycle management. Without a significant acceleration in performance transformation efforts, the industry's profit margins before interest, taxes, depreciation, and amortization (EBITDA) by 2027 are expected to be 50 to 100 basis points lower than in 2019.

However, there are notable exceptions within the healthcare sector. While profit margins from post-acute care services might be significantly impacted due to labor shortages, particularly in nursing, other areas of care could experience growth. For example, non-emergency care and outpatient services, such as doctor’s clinics and mobile surgery centers, are expected to thrive. The increasing adoption of value-based care models is likely to drive rapid growth in these sectors.

Projections indicate that profit margins for healthcare services and technology sectors, particularly those heavily reliant on technology, are expected to grow.

The healthcare services and technology sector is projected to experience faster growth compared to other healthcare sectors. In 2021, we forecasted that the sector's total profits would reach $51 billion. However, estimates for 2022 show a decline to $49 billion, attributed to market contraction, wage inflation, and the pullback from technological investments that did not fully achieve their goals. Looking forward, we expect a compound annual growth rate (CAGR) of 12% for profits between 2022 and 2027. This growth will be fueled by recovery from pandemic-related impacts and a return to long-term growth trends. The most significant acceleration is anticipated in software, platforms, and data analytics, with annual growth rates projected to be 15% and 22%, respectively, as the reliance on technology in healthcare continues to intensify.

In 2023, an initial recovery in the healthcare services and technology market has been observed, driven by reduced wage pressures and the ongoing adoption of technological solutions by payers and healthcare systems to enhance efficiency (such as automation and outsourcing).

Three key factors are expected to drive growth and recovery in the healthcare services and technology sector. First, there is a continued demand from payers and healthcare systems seeking to improve operational efficiency, address workforce challenges, and leverage new technologies (e.g., generative artificial intelligence). Second, payers and healthcare systems are likely to accept price increases from vendors offering measurable enhancements. Third, companies in this market are anticipated to implement operational changes that will enhance service efficiency by increasing automation and broadening the deployment of technology.

The pharmaceutical services sector is expected to maintain its growth trajectory.

The pharmaceutical services sector has undergone significant changes in recent years, driven by factors such as the impact of the COVID-19 pandemic, the establishment of partnerships across the value chain, and advancements in regulatory environments. These changes have contributed to sustained profit growth, with the market reaching $550 billion in 2022 and achieving a growth rate of 9%. Looking ahead, the sector is projected to grow at a compound annual growth rate (CAGR) of 5%, reaching $700 billion by 2027. Specialized pharmacy is one of the fastest-growing sub-sectors within pharmaceutical services, accounting for 40% of prescription revenue. This segment is expected to increase further, potentially capturing nearly 50% of prescription revenue by 2027. The compound annual growth rate (CAGR) for specialized pharmacy revenue is anticipated to be 8%, driven by rising demand, pricing increases, and ongoing expansion in pipeline treatments such as cellular and gene therapies, as well as treatments for cancer and rare diseases. Profit growth in this sector will depend on several factors, including reimbursement pressures, specialized medications, and increased adoption of biosimilars. Despite these opportunities, the specialized pharmacy sector faces challenges, including pressures from drug manufacturers related to the 340B pricing program and issues affecting contract pharmacies, such as size and location. Additionally, there has been a noticeable increase in investment in hospital-owned pharmacies within this sub-sector.

Last year saw increased interest in popular medications such as GLP-1s (glucagon-like peptide-1 drugs) used for diabetes and obesity. This category of medications represents the largest patient group for any new drug class introduced in the past 20 to 30 years. The growing focus on these medications has intensified discussions around care decisions, coverage, adherence, optimal usage, and patient access (e.g., through digital health services and telemedicine). Moving forward, patient cost burden, containment, and expenditure forecasting are likely to remain key topics in this sector. The Inflation Reduction Act is expected to amend benefits under Medicare Part D, focusing on reducing beneficiary out-of-pocket costs, negotiating certain drug prices, and increasing incentives for better management of high-cost medications. These changes, combined with rising interest in broad-spectrum medications and high-cost treatments (such as cellular and gene therapies), are likely to drive shifts in care and funding models.

Despite the challenges faced by the U.S. healthcare industry in 2023, including persistent inflation, labor shortages, and the aftermath of the COVID-19 pandemic, the sector has adapted to these conditions. This adaptation leads us to anticipate continued efforts to improve growth rates in the industry, aiming to address anticipated challenges in 2024 and beyond and return to historical profit margin averages.