In a difficult financial atmosphere popping out of the COVID-19 pandemic, US well being techniques are accelerating diversification methods to take part in new, high-growth healthcare segments and to help core hospital operations. They’re searching for to concurrently diversify income sources outdoors of core hospital operations and construct (or purchase) capabilities that may additionally profit the core—for instance, by enhancing affected person entry, high quality of care, expertise, and affordability.
We surveyed well being system executives to study extra about their diversification methods (see sidebar “Survey methodology”). Greater than 70 % of survey respondents mentioned they intend to take a position extra in diversification over the subsequent three years. This text explores the explanations well being system executives are pursuing diversification methods, the areas by which they plan to take a position, the constructions they may use to help their diversification goals, and concerns for efficient enterprise constructing.
Diversification might bolster well being system efficiency
At current, hospitals nonetheless characterize the biggest revenue pool within the care supply section; nonetheless, different care segments are rising way more shortly and are projected to seize an rising share of business income (Exhibit 1).
In the meantime, business traits could current challenges for well being techniques because the shift to care supply in ambulatory settings accelerates; labor and provide prices quickly escalate in an inflationary atmosphere; insurance coverage protection shifts to authorities plans; and risk-sharing, value-based care fashions proceed to achieve momentum.
Because of these difficult fundamentals, business median working EBITDA margins for not-for-profit well being techniques 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 detrimental outlook for the not-for-profit healthcare sector for 2022.
Nonoperating funding revenue had largely offset declining working revenue, serving to well being techniques keep on regardless of difficult working situations. Nonetheless, as of early 2022, many well being techniques skilled substantial funding losses, which, when mixed with rising prices, uncovered the gaps within the techniques’ monetary efficiency and prompted executives to step up their diversification efforts (Exhibit 2).
In the meantime, well being techniques more and more compete in opposition to well-capitalized incumbents from different healthcare segments and different industries—together with payers, personal fairness–backed medical teams, pharmacy advantages managers, know-how corporations, and different healthcare providers corporations—which might be aggregating care supply property to create massive healthcare ecosystems.
Actually, 5 of the biggest for-profit healthcare payers have already deployed greater than $120 billion of capital over the previous 5 years on diversified property and can probably proceed to take a position at an accelerated tempo.
Notably, they’ve largely excluded legacy acute care from these investments.
On this atmosphere, well being techniques executives more and more understand diversification as crucial to their future efficiency and development. The commonest causes that well being techniques executives cited for diversification had been producing money circulate 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 enhancing continuity of look after sufferers whereas additionally integrating directors and supporting know-how into different geographies.
Key questions for well being techniques pursuing diversification methods
Based mostly on our expertise standing up diversified development entities in healthcare and different industries, a number of questions and actions can assist well being techniques optimize the worth of their diversification efforts.
Answering questions associated to the technique (the “what”) and the enterprise infrastructure (the “how”) are early choice factors that may arrange the diversified enterprise for fulfillment (Exhibit 4).
Modern well being techniques are investing according to their development methods
Well being system investments in diversification usually align with three development methods: monetizing current capabilities, increasing past acute care, and constructing innovation capabilities (Exhibit 5). Well being system executives can then think about the precise pathways to pursue to attain their acknowledged goals. To monetize their current capabilities, for instance, they may rework a value middle (such because the income cycle or provide chain operate) right into a revenue middle, or they may lengthen internally developed care fashions to different suppliers (for example, hospital-at-home suppliers).
As they pursue methods aligned with their diversification goals, well being techniques can select amongst many alternative 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 development projections (Exhibit 6).
Certainly, executives are displaying a choice 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 providers (53 % of respondents), ambulatory surgical facilities (36 % of respondents), and well being plans (34 % of respondents).
When making funding choices, well being system executives can keep in mind 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 remodeling price facilities into revenue facilities) or providing cohesive ambulatory care providers—relatively than counting on episodic “large bang” transactions—is way extra more likely to obtain stronger efficiency and scale back publicity to threat.
Most well being techniques plan to make use of partnerships to help their diversification methods
After figuring out their development goals, the precise methods to pursue them, and the areas by which to take a position, well being techniques can discover the varied methods to construction their investments. At a excessive stage, their choices embody exterior funding (for example, making a enterprise funding or acquisition) or new-business constructing (for instance, by way of inside innovation, codevelopment, or the monetization of current capabilities).
Well being techniques that choose to make direct investments can enter at an early stage—that’s, seed capital or Sequence A to Sequence C funding—to entry extra progressive healthcare corporations by way of fairness, thus creating strategic worth, akin to offering entry to differentiated expertise, know-how, and market insights (Exhibit 7). These investments may create monetary worth: the sale of fairness as valuation will increase and there’s future money circulate if the start-up ultimately turns into worthwhile. Alternatively, those who intention to generate more money circulate within the close to time period or defend share in opposition to disruptors usually spend money on late-stage corporations—Sequence 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 techniques that search to create capabilities to spice up their core hospital operations could spend money on seed capital or Sequence A funding in healthcare start-ups. With an possession share, the well being system has entry to merchandise and can assist form their path. In return, the well being system creates worth for the start-up by offering shared providers, entry to hospitals and affected person populations to check and pilot merchandise, and mentoring and training by means of entry to the well being system’s executives.
Company enterprise capital (CVC) funds are gaining favor throughout industries as a automobile for housing diversification exercise inside massive enterprises. Amongst Fortune 100 corporations, 75 % have an lively CVC fund, and in response to Silicon Valley Financial institution, the variety of CVCs grew almost 6.5 occasions between 2010 and 2020.
Nonetheless, CVC fund efficiency has been combined, and there’s usually no vital 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 might be useful for start-ups and company homeowners alike, with every having fun with entry to recent insights, collaboration alternatives, and capabilities. Finally, the selections well being techniques make about the right way to construction their participation are knowledgeable by their particular monetary traits and capabilities (see sidebar “Inquiries to information funding choices”).
Given the challenges related to utilizing CVCs as a diversification technique, most well being techniques’ approaches to diversification have included partnerships or acquisitions, akin to M&A, strategic enterprise investments, or codevelopment with a capital associate. Actually, 82 % of well being system executives who responded to the diversification survey count on to associate 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 better nationwide scale), which well being techniques can attain by means of partnerships and enterprise constructing—in different phrases, establishing a brand new enterprise consortium with a number of well being techniques to pursue frequent themes.
Nonetheless, these well being techniques 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 % need to be majority homeowners, and 19 % have a tendency to not prioritize partnerships with personal fairness or enterprise capital (VC) corporations. 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 dad or mum 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 will help the mission, imaginative and prescient, and total technique of the well being system. Well being techniques can think about jumpstarting their diversification efforts with a significant acquisition or further funding in inside property, an method taken by profitable business-building organizations.
When selecting areas by which to take a position, these with a transparent path to generate worth for the core (and in the end the sufferers) usually tend to resonate with broader well being system stakeholders, together with physicians and nurses. Though the brand new enterprise will probably want some help from the core (for instance, shared providers), 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 understand its objectives.
Partnerships can speed up development and will enable well being techniques to faucet into in any other case hard-to-access assets or experience. Nonetheless, well being techniques may gain advantage by thoughtfully contemplating the worth they bring about to the desk in an effort to safe the correct companions. Having clear objectives and priorities will probably be essential, however, as with every start-up, taking an agile, iterative method and recognizing when to remain the course versus when to pivot will probably be crucial.
Lastly, we warning in opposition to anticipating monetary worth prematurely; worth creation usually takes time and endurance. Within the meantime, well being techniques can acknowledge the opposite advantages to diversification, together with constructing capabilities to raised serve sufferers and increasing information of latest markets.