Note: for my ‘read in browser’ folks – I will have the last 3 editions of the newsletter published online by the end of the week for your viewing pleasure.
A resurgence in applications of AI for healthcare will finally be matched by accelerated adoption
January Prediction: We’ve seen the launch of a handful of promising early stage companies with creative approaches to solve data infrastructure limitations.
Furthermore, larger companies like Snowflake, a pre-eminent data platform to support AI development, doubled down on healthcare this year, signaling that the sector, already one of its largest growth verticals, is expected to continue growing. Interestingly, Databricks, another pre-eminent data platform enabling AI development, announced a competing healthcare data lakehouse around the same time. As healthcare organizations continue to invest in improving their data infrastructures, AI development and the adoption of new applications is bound to follow.
…Current buzz around the potential applications of new large language models and generative AI are likely to fuel further interest and adoption.
Verdict: This is pretty self explanatory given the utter eruption in OpenAI, Microsoft, and funding for AI applications in healthcare.
Mental Health Phoenixes: Behavioral Health Redefines Itself
January Prediction: …Specifically, intellectual developmental disabilities will emerge as the top behavioral health priority: It’s estimated that 1 in 6 children has an intellectual developmental disability and prevalence rates have been rapidly increasing. The complex needs of this population drive total public spend on care that exceeds $65B annually, largely covered by Medicaid.
Given this complexity, the I/DD population has been amongst the last to transition to managed care. However, expect this to begin to change next year. In the last 18 months managed care spending on I/DDs (particularly Autism Spectrum Disorder) has increased by as much as 150%, as a result of access constraints and reimbursement policy changes borne out of the pandemic.
It’s no surprise that a quick search for “autism” on any government RFP database shows a 50% increase in posted bids over the last 12 months.
Verdict: As the prevalence in pediatric autism diagnoses continues to skyrocket and behavioral health services eats up a higher proportion of the premium dollar, we’ll see more and more focus from managed care players on the space.
Vertical Alignment = Healthcare Domination
Vertical alignment is and will continue to be the name of the game over the next decade, and things are already unfolding in this direction.
The ‘Payvidor’ space will be a key area to watch for healthcare organizations entering 2023.
Major payors are now creating their own versions of Optum with full services functions across pharmacy, benefits management, healthcare services, and technical infrastructure.
Verdict: Managed care players continue to buy up care delivery organizations and form ‘payvidor’ structures. We’ve seen significant deals to that end, including Optum’s bid for Amedisys and CVS’ acquisition of Oak Street Health.
Policy and technology will finally converge around elevating the role of non-physician providers in care
While technology holds some promise in unlocking incremental physician capacity, it’s clear that a growing supply of non-physician care providers will fill the majority of the latent capacity needed to service future care demand.
However, regulatory challenges and supply imbalances, among other challenges, currently limit the availability and utility of many of these providers.
So in 2023, expect to see policy changes that evolve scope of practice for nurses, ancillary care providers and public health workers and emerging technology that empowers non-physician care providers to play a larger role in the workforce.
Verdict: Nurse practitioners are among the fastest growing professionals in healthcare, and full practice authority isn’t going anywhere anytime soon. Expect mid-level scope creep to continue – the economics of healthcare drastically favor this long-term trend.
Risk Trickles into More Areas – Specialty Care, Commercial
It’s only natural that specialty care and commercial, employer sponsored insurance become the next frontier of value-based care. Expect to see risk-based contracting evolve in 2023, particularly in specialty care areas like oncology, cardiology, and MSK. Along with these specialties, ambulatory surgery centers will see innovative payment models, including higher levels of price transparency and cash pay for services.
Verdict: Players are emerging in the MSK and cardiology spaces, contracting with payors on interesting new risk arrangements to lower total cost of care. Meanwhile, the Enhanced Oncology Model begins on July 1, 2023.
A Tale of Two Health Systems
As discussed, health system financial distress is real, but more real for some than others. For instance, small to mid-sized health systems with fewer resources will get squeezed by contract labor costs, smaller outpatient footprints, and worse ability to negotiate commercial contracts. On the other hand, the largest systems with more resources should rebound in 2023.
Along with the above, the largest players will look to expand their outpatient footprints in 2023 to decrease reliance on the ‘old guard’ strategy of heads in beds and move away from the acute care strategy. In particular, expect to see continued focus and growth of physician alignment with ambulatory surgery centers (ASCs) and population health management (agilon, Aledade, Privia).
Finally, expect Cross-Market mega-mergers to become the norm for the future of health system M&A.
Verdict: Yes, yes, and yes. All three of these are playing out as predicted. We’ve seen the formation of Risant Health from Kaiser-Geisinger, hospitals are having to take a serious look at outpatient utilization given the shift and growth into the setting, and a recent WSJ article characterizes the current dynamic happening between different-sized health systems here:
- “The nation’s wealthiest hospitals largely emerged from the pandemic strained but still financially sound. Institutions now in trouble with lenders are more often solo hospital operators or small systems that entered the pandemic with less in reserves, hospital financial analysts and consultants said.
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“Hospitals have disclosed some kind of repayment difficulty for more than $10 billion in municipal bonds in the past 12 months, according to Municipal Market Analytics. Overall, about $12 billion in hospital bonds is impaired—nearly 4% of all hospital muni debt outstanding. That is the most in the past 15 years, including during the 2008-09 financial crisis.”
Now for the fun ones
Here’s the verdict on my way-too-specific predictions I made back in January:
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Between AWS healthcare moves and One Medical’s EHR, Amazon moves toward competing with Epic and Oracle-Cerner. PENDING (MORE LIKE 2050)
- Amazon makes moves similarly to Walmart-United to tap into the Medicare Advantage space. WRONG / PENDING
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Teladoc merges with a brick and mortar player and/or makes another acquisition to expand its services and value prop to health system players, employers given post-pandemic struggles, Livongo flop. BetterHelp struggles but outperforms other DTC mental health players financially. WRONG / PENDING
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At least one high profile PE-backed healthcare organization declares bankruptcy and/or restructures further. ER physicians and potentially other saturated consolidated spaces begin to depart from employment arrangements as equity value shrinks. We hit peak employment in the physician space. There’s an insane, intense fight over the No Surprises Act because of these dynamics. RIGHT
- Several small health systems restructure finances with bondholders or sell off in a fire sale. RIGHT
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Hospitals get less relief at the federal level but more funding at the state & local level (jobs are a helluva drug). PENDING; SORT OF RIGHT IN CALIFORNIA
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UpHealth, Babylon, Cano Health, P3 Health Partners, and Bright Health all get taken private, cease to be public, or are acquired. Cigna acquires Bright for the tax benefit. HALF RIGHT
- More venture capital partnerships with health systems take shape and grow more sophisticated in structure. PENDING / WRONG
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Digital health infra companies selling into other digital health firms will either have to move upstream or get squeezed as cash tightens up this year. HALF RIGHT
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With ACO REACH, value-based care players differentiate themselves between contenders and pretenders in the space. After extremely poor DCE performance and a major scale back in members for ACO REACH, Clover pulls out of ACO REACH altogether by the end of 2023. PENDING
- We see at least one health system mega-merger by mid 2023 similar in structure to Advocate-Atrium. RIGHT
- (Given by a subscriber): Privia enters at least two more markets with health system partners. PENDING
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(Given by a subscriber): CVS begins a ‘build’ strategy for primary care and engages with a notable private equity partner to do so (a la, Humana – WCAS and CenterWell). WRONG / PENDING
Blake’s Comeback public operators of the year in 2023: Tenet, Surgery Partners, Augmedix
YTD PERFORMANCE:
- Augmedix: 222%
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Tenet: 65%
- Surgery Partners: 54%
Blake’s Best performing healthcare stock guesses in 2023: Doximity, Acadia, InnovAge. MORAL OF THE STORY – DON’T TAKE INVESTMENT ADVICE FROM ME.
YTD PERFORMANCE:
- Doximity: -4.2%
- Acadia: -6.1%
- InnovAge: -2.9%
Blake’s Worst performing healthcare stock guesses in 2023: Staffing firms (AMN, CCRN) as competition for attracting labor, investment in the space among PE, venture heats up
YTD PERFORMANCE:
