2023 Healthcare Industry Outlook
As the COVID-19 pandemic shifts to endemic status, hospitals and healthcare operators are facing numerous industry challenges.
We have identified several important changes in the healthcare industry over the year ahead:
- Staffing Shortages and Labor Costs: Burned-out and skilled healthcare professionals continue to leave the industry, while some healthcare systems are cutting staff to rein in costs.
- Operating Margins: Profits are falling, and some operators are posting significant losses. Can this be turned around?
- Behavioral Health: Its provision and funding have become core issues.
- Technology: Healthcare systems are increasingly using digital health services and artificial intelligence to streamline services and reduce costs.
- Mergers and Consolidations: Could the current large-scale M&A activity lead to more consolidation?
- Disruptors: Pharmacy retail giants such as CVS and Walgreens continue to expand their healthcare presence and services. Can traditional healthcare systems compete?
- Private Equity: After another strong year in 2022, will PE investment continue in this challenging fundraising environment?
- The Economy: How will elevated inflation and a volatile banking industry impact key healthcare stakeholders?
- Policy Outlook: How will the healthcare sector be affected after the COVID-19 public healthcare emergency measures expire in May 2023?
In addition, the recent volatility in the banking industry will undoubtedly affect the sector. Liquidity is expected to tighten, limiting the growth potential of both occupiers and innovators. Private equity investors, in particular, could face pressure. Conditions are changing rapidly. We’ve grouped emerging trends into two primary categories: costs and consolidations.
Costs
From staffing shortages and labor costs to pinched operating margins and funding for behavioral health, costs are top of mind for the healthcare industry today. Inflation remains entrenched in the U.S. economy, even though it has shown signs of cooling. Technology is considered part of a potential solution. Insurers, networks, and individual providers are facing a Catch-22, including, on the one hand, substantial employee burnout and fatigue. Senior care, for example, faces substantial talent gaps. Hospitals average 100% turnover every five years, notes the 2022 NSI National Health Care Retention and RN Staffing Report, hurting not only patient care but also those forced to pick up the workload. Costs of recruiting, retention, and training are other factors. Yet higher costs are also forcing staff cuts across the country. According to data from Kaufman Hall, for-profit hospitals seem to be faring better than nonprofits in today’s environment. As awareness of behavioral health emerges and continues to grow, surveys show that hospital CEOs understand its increasing importance. However, because of numerous cost challenges and staff shortages, patients struggle to find a provider and pay for care. Not all clinicians take all insurance, which frustrates patients. The Advisory Board notes workforce shortages in behavioral healthcare as well as mismatches between available clinicians and the needs of a community. Practitioners are retiring at a high rate, and new physicians are entering the profession at a low rate. Both burnout and reimbursement procedures are obstacles for doctors.
The expiration of the federal public health emergency on May 11 will affect the healthcare industry in a variety of ways, including reimbursement rates at hospitals, telehealth reimbursements, Medicaid redeterminations, COVID-19 testing and access, and waivers and flexibility for hospital staff. These and other factors have led Kaufman Hall to predict a year of depressed margins in 2023. At the same time, per a Gallup poll, patients are delaying care at the highest rate ever due to cost concerns.
Technology is one potential solution. Bain & Company, along with Klas Research, note that hospitals and healthcare systems are spending more on technology and software to improve productivity and reduce costs and labor pressures. Digital health also attracted an abundance of venture capital in recent years, and while those investments slowed in 2022, they were still greater than the inflow experienced in 2020.
Consolidation
The healthcare industry has been experiencing mergers and acquisitions (M&A) activity, private equity investment, and overall disruption, providing an opportunity for innovation and change within the industry. Per data from PitchBook, private equity investment in the healthcare space was estimated at 863 deals last year, well ahead of the pre-2021 pace. It should be noted, however, that rising interest rates slowed private equity investment during the latter part of 2022, a trend experienced across most of the economy. IPO activity also stalled, which was not surprising. Meanwhile, M&A activity remained strong, attracting groups that want to interface with healthcare consumers, such as CVS, Walgreens, Amazon, and UnitedHealth. This could result in offering medication prescriptions online or connecting to virtual primary care and behavioral health services. With billions of dollars invested, these groups will become larger players in the healthcare space, creating further disruption in the industry. Expect to see continued consolidation and innovation in healthcare in 2023 and beyond. The lucrative healthcare market, with an aging population, an expanding population, and underserved communities, offers attractive investment targets.
Conclusion
Long-term trends in the medical office sector and the healthcare industry as a whole remain positive. Demand for space is outpacing supply, rents are rising, and the broader issues affecting the commercial office sector are not trickling down to medical properties. Investment sales volume set a record in 2022, thanks to the HR/HTA merger, while other asset classes experienced a decline. Innovation in the industry offers opportunities for providers and hospitals to evolve and find new ways of servicing patients. Technology creates expanded access to care and cost savings. The healthcare industry is well-positioned and will continue to evolve.
