Survival over strategy. This is the mindset of many healthcare business leaders amid the ongoing battle to manage costs, according to Head of PNC Healthcare Brian Kelly.
“The high-interest-rate, high-cost environment is really adversely affecting organizations throughout the healthcare ecosystem, to the point that it’s reshaping the landscape,” said Kelly. “Whereas in the past, there have been periods where healthcare companies were focused on being strategic about how they operated and positioned themselves for growth, right now they’re focused on doing what they need to do to survive in this climate.”
Continuing Consolidation
For many healthcare organizations, survival means consolidation. It’s a trend that will continue throughout 2024, as businesses look to achieve scale to manage rising costs or even continue to remain in operation. Smaller regional health systems and standalone community hospitals are arriving at the conclusion that their current cost structure is unsustainable and are therefore looking to partner with larger hospitals or health systems. Many ambulatory care clinics are also consolidating and aggregating into independent physician associations, in an effort to control labor and other back-office costs.
While overall demand for financing remains low due to higher interest rates, there is an increase in capital demand for acquisition related financing. Consolidation is driving demand for capital requests, either in the form of put options on bonds or other associated financings. There is a geographic component to the demand for financing, with some regions not seeing any significant demand for capital to finance new facilities or engage in major capex spending beyond basic investment in IT infrastructure. But in parts of the country where there is a significant level of activity in the market, it is largely coming from financing for mergers and acquisitions.
There is also an appetite for acquisitions in the private equity space, as there is considerable dry powder available to deploy. But investors are exercising caution, as private equity acquisitions are facing increased scrutiny from federal and state regulators and antitrust officials. Whether the Federal Reserve will cut rates later this year, and potential impacts from the upcoming presidential election, will also affect private equity firms’ acquisition strategies throughout the remainder of the year.
Technology Reshaping the Industry
Several trends rooted in technology are likely to affect the healthcare space throughout the remainder of the year. Proliferation of fraud remains a major concern, as cybersecurity breaches continue to impact healthcare organizations. Companies are focusing on ways to protect themselves to prevent cybersecurity breaches from becoming a disruptive issue.
Some larger healthcare providers are increasingly evaluating artificial intelligence (AI) solutions to help in both in both clinical and non-clinical areas as a means to better managing staffing ratios and reducing labor costs. For example, remote patient monitoring is garnering a lot of interest, including from private equity firms, but there will be limitations to the investment in the technology in the clinical arena, as there is a point at which digitization may affect the quality of patient care. Most likely, AI solutions will gain more traction early on in the non-clinical functions, like revenue cycle and administrative services, as there is less reputational risk at stake should there be issues.
Regulatory Headwinds for Pharmaceutical and Life Sciences (PLS)
Regulatory headwinds that have affected profitability in the PLS industry thus far in 2024 are likely to persist. Pharmaceutical companies continue to voice opposition to federal efforts to expand the number of drugs subject to annual Medicare price negotiations, an outcome of the Inflation Reduction Act. Regulatory efforts are also affecting laboratories, as the Food and Drug Administration released a final rule regulating laboratory developed tests (LDTs) as medical devices, which critics argue will slow development of cutting-edge diagnostics. In a similar vein, the Environmental Protection Agency recently finalized regulations that tighten emissions limits for sterilization facilities using ethylene oxide (EtO), a chemical commonly used to sterilize medical devices. Medical device groups have opposed the rule, raising concerns about potential medical device shortages and asking for more time and flexibility in the technologies to remove emissions.
Challenges for Insurers
Looking ahead to the rest of 2024, the healthcare insurance sub-sector is also likely to contend with familiar ongoing challenges. Medicare continues to put constant pressure on margins, due to both elevated utilization trends and lower-than-expected government reimbursement rates, and this is expected to spill into 2025 pricing, enrollment, and profitability levels. After several quarters of decline after the COVID-19 pandemic, medical services inflation increased again in the first quarter of 2024. If it continues to rise or remains elevated, these costs will need to be passed through and will continue to adversely impact healthcare providers and customers. Overall, the outlook presents challenges for health insurers, but these may be partially mitigated by higher investment income (due to higher short-term rates) and historically low unemployment supporting the commercial lines of business.
Navigating the Environment
As healthcare organizations continue to navigate challenges, they may need to adjust their approach, and part of this adjustment may entail leaning on experienced advisors. “There’s no doubt we’re in a tough cycle, but there are paths forward. PNC Healthcare can work with entities across all healthcare sub-sectors to find them,” said Kelly.
Ready to Help
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.
