In a difficult financial setting popping out of the COVID-19 pandemic, US well being programs are accelerating diversification methods to take part in new, high-growth healthcare segments and to assist core hospital operations. They’re searching for to concurrently diversify income sources exterior of core hospital operations and construct (or purchase) capabilities that may additionally profit the core—for instance, by bettering affected person entry, high quality of care, expertise, and affordability.
We surveyed well being system executives to be taught extra about their diversification methods (see sidebar “Survey methodology”). Greater than 70 % of survey respondents mentioned they intend to speculate extra in diversification over the subsequent three years. This text explores the explanations well being system executives are pursuing diversification methods, the areas during which they plan to speculate, the buildings they might use to assist their diversification targets, and concerns for efficient enterprise constructing.
Diversification might bolster well being system efficiency
At current, hospitals nonetheless symbolize the most important revenue pool within the care supply phase; nevertheless, different care segments are rising rather more shortly and are projected to seize an growing share of trade earnings (Exhibit 1).
In the meantime, trade traits could current challenges for well being programs because the shift to care supply in ambulatory settings accelerates; labor and provide prices quickly escalate in an inflationary setting; insurance coverage protection shifts to authorities plans; and risk-sharing, value-based care fashions proceed to achieve momentum.
On account of these difficult fundamentals, trade median working EBITDA margins for not-for-profit well being programs have been steadily however steadily declining, from 11.6 % in 2012 to eight.6 % in 2020, with no reversal in sight.
Actually, Moody’s has issued a unfavourable outlook for the not-for-profit healthcare sector for 2022.
Nonoperating funding earnings had largely offset declining working earnings, serving to well being programs keep on regardless of difficult working situations. Nonetheless, as of early 2022, many well being programs skilled substantial funding losses, which, when mixed with rising prices, uncovered the gaps within the programs’ monetary efficiency and prompted executives to step up their diversification efforts (Exhibit 2).
In the meantime, well being programs more and more compete towards well-capitalized incumbents from different healthcare segments and different industries—together with payers, non-public fairness–backed medical teams, pharmacy advantages managers, know-how corporations, and different healthcare companies companies—which can be aggregating care supply property to create giant healthcare ecosystems.
Actually, 5 of the most important for-profit healthcare payers have already deployed greater than $120 billion of capital over the previous 5 years on diversified property and can seemingly proceed to speculate at an accelerated tempo.
Notably, they’ve largely excluded legacy acute care from these investments.
On this setting, well being programs executives more and more understand diversification as important to their future efficiency and progress. The most typical causes that well being programs executives cited for diversification had been producing money move and creating worth and capabilities for his or her core hospital enterprise (Exhibit 3). For instance, a well being system might purchase a risk-bearing main care group, thus creating higher alignment with physicians and bettering continuity of take care of sufferers whereas additionally integrating directors and supporting know-how into different geographies.
Key questions for well being programs pursuing diversification methods
Primarily based on our expertise standing up diversified progress entities in healthcare and different industries, a number of questions and actions may help well being programs optimize the worth of their diversification efforts.
Answering questions associated to the technique (the “what”) and the enterprise infrastructure (the “how”) are early determination factors that may arrange the diversified enterprise for achievement (Exhibit 4).
Modern well being programs are investing according to their progress methods
Well being system investments in diversification sometimes align with three progress methods: monetizing current capabilities, increasing past acute care, and constructing innovation capabilities (Exhibit 5). Well being system executives can then take into account the precise pathways to pursue to realize their said targets. To monetize their current capabilities, for instance, they might remodel a price middle (such because the income cycle or provide chain operate) right into a revenue middle, or they might prolong internally developed care fashions to different suppliers (as an illustration, hospital-at-home suppliers).
As they pursue methods aligned with their diversification targets, well being programs can select amongst many various healthcare segments to focus on for funding. We explored curiosity in these segments within the diversification survey and overlaid the outcomes with our 2021–25 EBITDA progress projections (Exhibit 6).
Certainly, executives are displaying a desire for investing within the highest-growth, most worthwhile segments.
Based on the survey, telehealth and distant affected person monitoring is the chance with the very best space of focus, with 56 % of respondents rating it amongst their prime 5 decisions, adopted by value-based companies (53 % of respondents), ambulatory surgical facilities (36 % of respondents), and well being plans (34 % of respondents).
When making funding selections, well being system executives can take into consideration what earlier McKinsey analysis has affirmed: prime programmatic acquirers create an M&A blueprint or highway map that states the place and the way M&A will improve their aggressive benefit.
On this case, for instance, constructing a hospital shared-services platform (thereby reworking price facilities into revenue facilities) or providing cohesive ambulatory care companies—somewhat than counting on episodic “massive bang” transactions—is way extra more likely to obtain stronger efficiency and scale back publicity to threat.
Most well being programs plan to make use of partnerships to assist their diversification methods
After figuring out their progress targets, the precise methods to pursue them, and the areas during which to speculate, well being programs can discover the varied methods to construction their investments. At a excessive stage, their choices embody exterior funding (as an illustration, making a enterprise funding or acquisition) or new-business constructing (for instance, through inner innovation, codevelopment, or the monetization of current capabilities).
Well being programs that choose to make direct investments can enter at an early stage—that’s, seed capital or Collection A to Collection C funding—to entry extra revolutionary healthcare corporations through fairness, thus creating strategic worth, comparable to offering entry to differentiated expertise, know-how, and market insights (Exhibit 7). These investments can even create monetary worth: the sale of fairness as valuation will increase and there’s future money move if the start-up ultimately turns into worthwhile. Alternatively, people who goal to generate extra money move within the close to time period or defend share towards disruptors sometimes spend money on late-stage corporations—Collection D or buyout—to speed up the speed-to-market of the brand new income with extra predictable money flows, thereby creating monetary worth.
Well being programs that search to create capabilities to spice up their core hospital operations could spend money on seed capital or Collection A funding in healthcare start-ups. With an possession share, the well being system has entry to merchandise and may help form their path. In return, the well being system creates worth for the start-up by offering shared companies, entry to hospitals and affected person populations to check and pilot merchandise, and mentoring and training by way of entry to the well being system’s executives.
Company enterprise capital (CVC) funds are gaining favor throughout industries as a car for housing diversification exercise inside giant enterprises. Amongst Fortune 100 corporations, 75 % have an energetic CVC fund, and in line with Silicon Valley Financial institution, the variety of CVCs grew almost 6.5 instances between 2010 and 2020.
Nonetheless, CVC fund efficiency has been combined, and there’s sometimes no important relationship between CVC investments and monetary outcomes.
Though reaching monetary success with CVCs is comparatively uncommon and takes longer to manifest than investments within the core hospital enterprise, these funds could be useful for start-ups and company house owners alike, with every having fun with entry to contemporary insights, collaboration alternatives, and capabilities. Finally, the choices well being programs make about the way to construction their participation are knowledgeable by their particular monetary traits and capabilities (see sidebar “Inquiries to information funding selections”).
Given the challenges related to utilizing CVCs as a diversification technique, most well being programs’ approaches to diversification have included partnerships or acquisitions, comparable to M&A, strategic enterprise investments, or codevelopment with a capital accomplice. Actually, 82 % of well being system executives who responded to the diversification survey count on to accomplice with others as they pursue their diversification methods (Exhibit 8). Moreover, the shift to care supply in quite a lot of new settings favors members with distinct capabilities (enhanced by higher nationwide scale), which well being programs can attain by way of partnerships and enterprise constructing—in different phrases, establishing a brand new enterprise consortium with a number of well being programs to pursue widespread themes.
Nonetheless, these well being programs have additionally outlined a number of guardrails, reflecting the necessity for a cautious method to type partnerships. Among the many surveyed well being system executives, 57 % wish to be majority house owners, and 19 % have a tendency to not prioritize partnerships with non-public fairness or enterprise capital (VC) companies. Past the necessity to make investments inside these guardrails, joint ventures (JVs) and partnerships current blind spots—for instance, a rush to completion, lack of management continuity, declining mum or dad involvement, and inadequate planning to answer adjustments in threat profile—that well being system executives can work to keep away from.
An absence of consideration to those nuances has led many efforts to fall in need of expectations.
Finally, income diversification methods ought to create worth for the core hospital enterprise and the communities it serves and may assist the mission, imaginative and prescient, and total technique of the well being system. Well being programs can take into account jumpstarting their diversification efforts with a significant acquisition or extra funding in inner property, an method taken by profitable business-building organizations.
When selecting areas during which to speculate, these with a transparent path to generate worth for the core (and finally the sufferers) usually tend to resonate with broader well being system stakeholders, together with physicians and nurses. Though the brand new enterprise will seemingly want some assist from the core (for instance, shared companies), delineating revenue and loss between the 2 entities can help with efficiency monitoring and supply the brand new enterprise with sufficient distance from the core to comprehend its targets.
Partnerships can speed up progress and will enable well being programs to faucet into in any other case hard-to-access assets or experience. Nonetheless, well being programs may benefit by thoughtfully contemplating the worth they carry to the desk in an effort to safe the fitting companions. Having clear targets and priorities will probably be essential, however, as with all start-up, taking an agile, iterative method and recognizing when to remain the course versus when to pivot will seemingly be important.
Lastly, we warning towards anticipating monetary worth prematurely; worth creation sometimes takes time and endurance. Within the meantime, well being programs can acknowledge the opposite advantages to diversification, together with constructing capabilities to raised serve sufferers and increasing data of recent markets.