Category: Digital Health

Since Medicare coverage first took effect almost six decades ago, the program’s runaway spending has played a leading role in the story of the federal budget. Now, the end of that growth is stealing the spotlight.

An excellent piece in The New York Times highlighted how Medicare’s unsustainable climb reached a turning point in 2011, and for reasons that aren’t exactly clear.

In 2011, Medicare spending per beneficiary (MSPB) reached $13,159, nearly double the level it was at near the turn of the century.

• If historical growth had sustained beyond that point, we’d currently be sitting at roughly $22,006 MSPB. Luckily, that’s not what happened.

• Spending leveled out, and we now find ourselves at $12,459 MSPB, a nearly $4 trillion gap compared to previous projections… yet the underlying cause remains a mystery.

The trillion dollar question: what changed? The authors call out obvious shifts in Medicare policy, namely the Affordable Care Act in 2010, and its reduced Medicare payments to hospitals and payors with private Medicare Advantage plans.

• While ACA was certainly a contributor, most of the reductions are attributed to a category that the budget office calls “technical adjustment,” which describe changes to a wide base of topics such as the expansion of cholesterol and blood pressure medicines.

The NY Times concludes that the true reason for the change is a hard problem that remains unsolved, but the smart folks on social media were quick to pick up where they left off, floating possibilities such as:

• As MA lives increased, the types of MA plans also improved due to the phasing out of inefficient plan designs
• Age of death increases stopped around this time, so US citizens aren’t living to older ages with increasingly complicated health issues 
• The rise of ACOs started in 2012, although we just covered why that factor probably doesn’t account for a huge share of cost reductions

The Takeaway

Savings attribution has always been a fundamental challenge for the healthcare industry, underpinning many of the issues with value-based care and other alternative models. Now that we’ve found ourselves at an inflection point where Medicare spending is slowing but still outpacing the federal budget, the solution to that savings attribution problem will also be what lets us identify the levers that will keep the trend heading in the right direction.

The pent-up-demand narrative is back on the menu. Speaking at Goldman Sachs’ Global Healthcare Conference, the CEO of UnitedHealthcare’s Medicare business Tim Noel said that costs are on the rise due to elevated demand for outpatient procedures.

• “We’re seeing that more seniors are just more comfortable accessing services for things that they might have pushed off a bit like knees and hips.”

That quip sent shares of UnitedHealth Group sliding over 6%, wiping out roughly $29B from the healthcare giant’s market capitalization in one of its largest single-day drops in years.

• United now expects its Q2 medical loss ratio (percentage of spend on claims versus premiums collected) to be moderately above its full year forecast (82.1% to 83.1%).

• The stocks of other major Medicare players took a pretty significant sympathy dive, with CVS (-7%) and Humana (-11%) getting the worst of it.

Why is this important? Payors have been enjoying a lull in surgery expenses due to hospital-wary patients postponing care during the pandemic, but that trend might be reversing.

• Although several surveys have suggested that some of these skipped appointments are lost for good, United’s comments show that Medicare patients are getting back on track.

That’s good news for hospital operators and medical device companies, whose revenue is closely tied to surgery frequency.

• Shares of hospital operators Tenet Healthcare and HCA Healthcare each jumped on the news, while joint replacement and implant manufacturers like Stryker and Zimmer Biomet climbed around 4%.

The Takeaway

Investors are listening closely for any signs of increased payor costs as patients start catching up on postponed care, and United’s role as the bellwether for the group means that even off-the-cuff comments at conferences are heard loud and clear. While the extent of the pent-up-demand remains to be seen, United seems to think the pressure could start shifting from hospitals to payors in the second half of the year.

The digital health sector has gotten a bit of an ego check since the white hot market at the start of the pandemic. Rising interest rates and a minor banking crisis continue to put a damper on startups’ ability to raise capital, but a mid-year prediction roundup from some of healthcare’s top dealmakers gives a good preview of what might come next as the market cools.

Dudley Baker, Canaccord Genuity. Notable moves: Privia Health IPO, Doximity IPO

• Since 2020, many startups have sprung up to provide specialized behavioral health and chronic condition management benefits to employers, but the surge in valuations made many of them too expensive to acquire. These companies could have a hard time raising more capital on their own, so Baker expects them to seek out mergers of equals instead.

Claire Pearson, Barclays. Notable moves: Cricket’s merger with InterWell and Fresenius 

• Pearson sees four areas ripe for M&A centered around new tech capabilities and scale: women’s health, orthopedics, cardiology, and kidney care. Pearson pointed to Cricket’s merger with InterWell and Fresenius as an example of what works in each of these sectors – it combined contracting, providers, and technology under one roof.

Fletcher Gregory, General Atlantic. Notable investments: Included Health, Vida Health

• Employers weary from working with too many vendors have begun narrowing their focus to companies that can deliver outcomes and lower costs. To make the cut, Gregory predicts that digital health startups working on a single problem are going to have to improve their clinical models in ways that they likely can’t do without combining.

Seth Kneller, TripleTree. Notable moves: KKR’s acquisition of Therapy Brands.

• Kneller favors companies that are addressing the labor crisis by helping hospitals and health systems become more efficient. Companies using AI to take over tasks like clinical documentation and administrative work look especially attractive to acquirers, but only if they can prove cost reductions for hospitals. 

Karl Palasz, William Blair. Notable moves: Fortive’s acquisition of Provation

• Companies that employ behavioral health providers to deliver virtual care have struggled to live up to expectations due to a lack of differentiation and the clinician shortage. Palasz has his eye on companies that provide software to niche behavioral health practices, such as substance-use recovery or autism.

The Takeaway

Pending any major economic catastrophe, it seems like the general consensus is that the tide could start turning for digital health M&A within the next few months. Although the IPO market will probably stay limited, the partnerships that are forming now are setting the stage for more M&A in the back half of the year as companies look to combine so they can better weather the tough funding environment.