Weekly Business Insights 02/19/2024
Healthcare’s next chapter: What’s ahead for the US healthcare industry. The Role of Artificial Intelligence in Enhancing the Delivery of Healthcare and AI can reduce cost. Health Cost and Affordability Policy Issues and Trends to Watch in 2024.
Healthcare’s next chapter: What’s ahead for the US healthcare industry
Hospital systems face a 200-basis point gap between reimbursement rates and cost inflation, according to McKinsey analysis. The gap could require performance transformations on the part of health systems, including more outsourcing, ramping up digital and automation efforts, and business rationalization.
These cost pressures offer many opportunities for tech-enabled services companies that can show customers near-term return on investment from their products. At the same time, many healthcare services and technology companies without demonstrable return will face severe downside to their businesses.
Higher interest rates and less liquidity in the financial markets have raised the hurdle rate for private equity (PE) and venture capital firms. In these circumstances, private investors must ensure their portfolio companies deliver bottom-line performance, produce organic growth backed by proven business models, and have the ability to make any inorganic growth accretive based on robust capabilities. Large, well-capitalized healthcare companies will find a favorable valuation environment for acquiring PE portfolio companies as well as for forming strategic partnerships with private investors.
The Role of Artificial Intelligence in Enhancing the Delivery of Healthcare and AI can reduce cost
The US spends 16.9 percent of its gross domestic product on healthcare, yet it has the lowest life expectancy and highest suicide rates in comparison to 10 other countries with similar economic development.1 This was corroborated by a 2016 study whereby the US was found to spend more than twice as much as other countries yet had worse healthcare outcomes.2
Included in these healthcare costs are the administrative costs associated with running the operations. Here, too, the costs are higher in the US than in other countries. While the US spends 8 percent of healthcare money on administrative costs, other countries spend 1-3 percent.3 The National Health Expenditure Accounts’ research in 2018 found almost an exact figure at 8.5 percent.4 Overall costs, administrative costs, and outcomes need to be addressed to develop a more efficient healthcare delivery system.
Information technology platforms, such as decision support systems and electronic health records (EHRs), have played a role in cost containment. EHRs that contained clinical decision support alerts were used to prevent errors and adverse medication reactions, which, in turn, saved money.5 A study by Lewkowicz et al. found that clinical decision systems reduced waste, which could be equated to cost savings.6 Studies on EHRs did not address administrative costs and thus falls short of combatting our initial grand challenge. Artificial intelligence (AI) may hold the answer. AI is relatively new to healthcare, but it has multifaceted uses that impact costs, delivery, and quality. AI uses predictive analytics and, thus, it can have an effect from the very onset of the patient encounter.
Health Cost and Affordability Policy Issues and Trends to Watch in 2024
Before the Inflation Reduction Act, CMS projected aggregate out-of-pocket retail prescription drug spending to increase steadily throughout the 2020s. CMS now expects out-of-pocket drug spending to peak in 2023 at $52.5 billion and decline thereafter through 2027 as provisions take effect. By 2030, total out-of-pocket spending on retail prescription drugs is projected to be $48.1 billion, 18.5% lower than the $59.0 billion projected previously. While none of these provisions cover privately insured people, the effects of some of the Medicare drug price regulations may spill over to the private market, though the effects are highly uncertain, including whether manufacturers might attempt to make up for lost revenue in Medicare by raising prices for other payers.
However, there are some limits on the extent to which states can address drivers of health spending. For example, states are the primary regulators of providers, but can only regulate fully-insured private health insurance plans, which cover just one-third of workers nationally. While there is not a singular national health care cost control strategy, states’ efforts could influence federal policy makers. In 2024, states with cost containment efforts are likely to put effort into demonstrating their effectiveness, and states without these programs may consider adding them.