1. Healthcare has a simple math problem.
The population of the United States is more than 334 million people, and we have 1.1 million active physicians. We are hyper short on primary care physicians and specialists, with one of the lower counts of physicians per capita compared to other developed nations. This one problem spills over to affect most everything else in the industry. The U.S. has one of the lengthiest and most expensive medical school systems in the world that has not kept up with demand nor expanded the number of students it trains, producing about 28,000 graduates per year with about 20,000 MDs and about 8,000 DOs. Additionally, more physicians are retiring or transitioning to part-time practice at earlier stages of their careers than ever before.
2. Healthcare has a power problem.
The largest health insurers are also some of the largest companies in the country by revenue. The largest health systems and provider groups pale in comparison to them and are largely disparate versus concentrated.
3. Healthcare has a binary thinking problem.
It's not tech or people, it's both. Technology plays an increasingly supportive role for efficiency and accessibility in healthcare, but it will never be able to compensate for the majority of skill, expertise, talent, experience and human touch that powers a health system. As demand for healthcare services continues to mount, exacerbated by our aging population and prevalence of chronic conditions, the importance of a well-trained and adequately staffed healthcare workforce is more pronounced than ever before.
4. It's not the payment system.
Economists and politicians have a fixation on the fee-for-service payment system. The real issue isn't the payment system. We have basic economic flaws in the healthcare system. Regardless of which payment system we have, it won't resolve those issues. The real challenge is we don't have enough physicians, advanced practice providers, nurses and allied health professionals. We need weight loss, with roughly two out of three U.S. adults being overweight or obese and one out of three obese, contributing to greater risk for a host of chronic health conditions and needs. Moreover, there's a pressing need for advancements in therapeutics and pharmaceuticals, as well as streamlined technology and less convoluted administrative systems to enhance overall healthcare delivery. Value-based care is not a panacea.
5. Walmart, Walgreens and CVS are all pulling back.
Ultimately the old adage of "if you build it, they will come" has proven untrue. In healthcare, it's more like if you build it, you still can't staff it. This past year has been a tough one for CVS, Walgreens, Rite Aid and Walmart, each of which tried to venture further into the provision of healthcare, primary care and pharmacy in recent years. As these retail and pharmacy giants try and falter to move into healthcare, I am reminded of something Warren Buffett said after the much-anticipated venture Haven — backed by Berkshire Hathaway, JP Morgan and Amazon — disbanded after three years: "We learned a lot about the difficulty of changing around an industry that's 17 percent of GDP."
6. Medicare and Medicaid account for more than 50% of healthcare today.
Health systems see a significant proportion of their reimbursements from the governmental health insurers, a trend only expected to intensify as all baby boomers will be 65 or older by 2030. Growing reliance on government-funded programs presents immediate business concerns for hospitals and health systems given that Medicaid fee-for-service payments for physician services are nearly 30% below Medicare payments, which are well below commercial rates.
7. Medicare Advantage is more than 50% of Medicare, and so far it's underwhelming.
Nearly 31 million people, or 51% of eligible Medicare beneficiaries, enrolled in Medicare Advantage in 2023. So far, MA programs are overpaid by tens of billions of dollars relative to traditional Medicare and without measurably better outcomes.
8. Tech helps, but it's not a panacea.
So often when a healthcare leader is asked about their strategy to address physician or workforce shortages, they tend to share an extensive list of technological products. This is not reassuring. Radiology was one specialty that originally felt the benefits of technology via telehealth and more recently AI, and there are still significant shortages of radiologists and radiologic techs nationwide. EHRs were once heralded in the early 2000s to save clinicians time — we see how that played out. Telehealth, remote patient monitoring and other tech tools may augment the workforce and help reduce wait times depending on patient need, but the mode of care delivery doesn't sustainably solve for the growing shortage of people who provide it.
9. Behavioral health is a daunting challenge.
There is no shortage of demand for behavioral and mental healthcare. It is estimated that 1 in 5 Americans already lived with a mental illness before the COVID-19 pandemic, which only exacerbated demand for this type of healthcare. Rates of depression among adults hit a high in 2023, suicides hit an all-time high in 2022, and emergency department visits for children's mental health conditions have surged over the past several years. Despite heightened demand on a national scale, the mental and behavioral healthcare system remains fragmented with state-level disparities. Medicaid stands as the largest single payer for mental health services in the U.S., compensating psychiatrists at an average of 81% of Medicare rates. This reimbursement gap is compounded by another pressing issue: the shortage of mental health professionals, going back to the first point.
10. Weight loss drugs bring promise and questions.
GLP-1 drugs used for weight loss and to treat diabetes and other chronic health needs have been on the market for years but gained popularity and awareness after 2020. The medications are already lowering projections for hospitals' bariatric surgery volumes, and pharmaceutical companies are actively exploring various additional areas for these drugs. These potential indications encompass a wide range of health conditions, such as sleep apnea, kidney disease, metabolic dysfunction-associated steatotic liver disease, dementia, Parkinson's disease, addiction, anxiety, depression and cancer. While the potential is noteworthy, current use is still small. Despite the noteworthy potential, current utilization remains relatively modest. About one in eight adults say they have taken one of the drugs.
11. Private equity is demonized, but marks a relatively small percent of healthcare.
Private equity is tied to 9% of private hospitals and 30% of proprietary for-profit hospitals (which make up 36% of all U.S. hospitals). While it's essential to examine pricing, competition, and care quality within these organizations, lawmakers should also focus on addressing numerous pressing healthcare issues affecting broader segments of the industry. The issue runs the risk of becoming a congressional or political red herring.
12. Hospitals and provider margins improved in 2023, but it's very much a story of haves and have nots.
Too many hospitals are losing money as high-performing hospitals are doing better and better. About 40% of U.S. hospitals are losing money from operations in 2024. This challenge is particularly acute in rural and urban settings, exacerbating issues of access and equity within healthcare.
13. Hospitals want to be the Nasdaq.
Fewer bricks-and-mortar buildings and less staff, but it's very difficult to fully move in that direction. Hospital leaders express frustration with the split position they find themselves in today, knowing healthcare delivery is forecasted to increasingly move out of the hospital but nonetheless facing great need for more staffed beds today. Hospital-at-home programs are still trying to figure themselves out and make up a very small portion of care delivery, with some systems still standing up their first programs this year and others that have long-standing programs caring for about 25 to 50 patients per day.
14. Health systems have curbed some capital investment spending but continue to focus on key specialties.
Many health systems are increasing their footprints and capacity for key specialties like cardiology, orthopedics and oncology, with some movement toward smaller, specialty-specific hospitals and outpatient settings. Some recent and significant investments include Dana-Farber's new partnership with Boston's Beth Israel Deaconess for a brick-and-mortar cancer hospital in the city, a new $4.3 billion hospital planned by UCSF Health for specialty and surgical care, University of Chicago Medicine's $815 million cancer center, and Northwell Health's $560 million surgical pavilion for cardiac, neurosurgery and transplant care.
15. Customer concentration matters.
When a significant portion of revenue comes from a limited number of payers or sources, it is increasingly difficult for health systems to be antifragile. The future of many hinges on the choices of a few. Customer concentration influences negotiation power, pricing structures and service offerings, as providers seek to maintain and expand their customer base while diversifying revenue streams. As governmental payers make up a larger portion of health system reimbursement and the big commercial insurers maintain their amassed power and profits, health systems face higher stakes to diversify their revenue streams.
16. Senior care raises massive needs and increasingly hard to make the numbers work.
The aging population is driving demand for specialized services, but meeting seniors' complex needs often requires substantial investments in staffing, equipment, infrastructure and wraparound services. As patient acuity and cost of care continues to rise and reimbursement rates remain stagnant, hospitals and health systems face mounting pressure to make the numbers work within increasingly tight constraints.
17. Academic medical centers have moved back to the forefront of healthcare in many ways.
Their research capabilities, close ties to medical students and residents, and ability to educate and build pipelines for their workers all mark important advantages in today's healthcare landscape. While they still face headwinds of financing, staffing and hefty overhead cost structures, AMCs remain vital hubs for specialty, complex, and high-acuity healthcare within their respective markets. More and more, there are no viable substitutes for what the great AMCs do.