A frozen capital market and an insurance coverage premium shock: 10 well being care predictions for 2023 from high buyers

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Welcome again to predictions season. We’re happy to share what we see in our nonetheless murky, and materially extra dinged-up, crystal ball for 2023. However first, let’s look again and see how we did with our 2022 predictions.

In 2022, we scored 7 out of 10, approaching our earlier high-water mark of 8 out of 10 in 2021. We additionally wish to word that one in every of our evergreen predictions–specifically, nothing would occur on drug costs–was an epic fail after the passage of the Inflation Reduction Act

Moreover, we didn’t predict that we’d all get up to Seventies-style inflation and a Fed mountaineering cycle. This induced a sudden finish to…nicely, nearly every little thing: progress financings, IPOs, and frothy mergers and acquisitions (M&A). 

What we thought may have been a really profitable 2022 IPO class must wait till the markets enhance. We predicted M&A to double in quantity and worth. Whereas offers did exceed 2021 numbers by quantity, worth is lagging since many of those offers are being executed in misery. 

We anticipated the Facilities for Medicare & Medicaid Providers (CMS) to make strikes to switch threat adjustment in Medicare Benefit (MA)–however nothing occurred.  

Nonetheless, we have been appropriate a couple of bunch of predictions. COVID-19 deaths plummeted and lengthy COVID grew to become extra feared than acute an infection. On the authorized aspect, the Supreme Courtroom did overturn Roe v. Wade, and Elizabeth Holmes goes to jail. 

Karen Lynch, the CEO of CVS-Aetna, might need learn our prediction that payors could be racing to get into major care. On Aug. 2, Lynch said, “(CVS) can’t be within the major care with out M&A,” and that “we’re very inspired and assured that we’ll take the subsequent step on this journey by the top of this yr.” Lastly, the controversial Alzheimer’s drug Aduhelm launched with a whimper, and genetic sequencing firm Illumina is dealing with actual competitors (see prediction #9).  

Now on to 2023. Here’s what we expect goes to occur:

1. Personal progress capital markets stay chilly

Whereas the non-public capital markets will ultimately recuperate, phrases (worth, bells, and whistles) will likely be painful in comparison with prior years’ largesse. CEOs can have good purpose to have a good time if they’ll obtain any progress spherical with clear phrases and at the very least flat pricing. 

2. Fed will increase charges to five.5% or larger

We predict that the Fed goes to keep away from undershooting on rates of interest and go for what they suppose will likely be a shorter recession now, versus the danger of protracted stagflation later. This makes us extra bearish than most bankers who are actually forecasting peaks of 5-5.25% after not too long ago predicting decrease peak rates of interest.  

3. Industrial insurance coverage premium inflation shock

Whereas we consider that the Fed will succeed at controlling inflation for the general economic system, industrial medical health insurance premiums will likely be an inflation outlier. Since well being care, as a market, tends to be much less conscious of the macro economic system, hospitals will succeed at elevating their charges by 5 to fifteen% yearly for industrial insurance coverage corporations. Insurers will go this further value alongside to employers within the type of premium will increase in extra of 10%. This can check the bounds of what employers will settle for.

4. Particular person Protection Well being Reimbursement Preparations (ICHRAs) take off

In response to premium shocks, 2023 will lastly be the yr a significant variety of small teams drop protection and push folks to exchanges. ICHRAs is a coverage enacted in 2020 that permits small employers to present their employees pre-tax contributions that can be utilized to purchase insurance coverage as people. These people can also qualify for tax subsidies, which can make it a extra engaging choice than high-deductible employer plans for lower-wage employees.  

5. Nothing adjustments on threat adjustment in Medicare Benefit

Regardless of our 2022 prediction that Medicare would make adjustments to threat adjustment, we are actually firmly within the “nothing goes to occur” camp. We predict case may be made that threat adjustment is working nicely for getting sicker sufferers higher entry to well being care and incentivizing innovation and funding to learn them. Moreover, we expect {that a} Republican Home goes to quash any and all progressive considerations about profiteering in Medicare. 

6. The brand new technology of weight reduction medication spawns the subsequent Cerebral

Cerebral is infamous for mainly prescribing ADHD medication to anybody, with disastrous penalties. We consider {that a} comparable lack of oversight, in addition to a conflicting set of incentives and weak moral boundaries, will create an identical dynamic amongst the direct-to-consumer weight reduction corporations as extra folks turn out to be conscious of the brand new efficient weight reduction medication.  

7. Well being tech M&As set an (notorious) file for many offers

For 2022, we predicted a doubling in deal rely and worth for well being tech M&A. In 2023, we’re solely predicting extra offers than in 2022, regardless that 2022 was a file yr when it comes to the whole variety of M&A offers accomplished. 2023 will break that file–however many of those offers will proceed to be distressed as cash-burning corporations fail to lift extra fairness. Acquirers, each giant public corporations and personal corporations which have robust progress and margins, will look again in a number of years and see numerous worth created by means of their 2022-2023 acquisitions.

8. Congress ratifies telemedicine–and gridlock ensues

The one well being coverage that Congress may enact in 2023 will allow telemedicine in authorities applications. We consider that the proof is overwhelming that telemedicine is clinically helpful, appreciated by sufferers, and allows modern scientific fashions. We can not think about taking digital care away from seniors–and we additionally suppose digital care will likely be important for bettering entry to specialty care in much less city areas and excessive labor value markets. After which nothing else will get executed.

9. No holy Grail for Illumina  

Given regulatory pushback, by the top of 2023, Illumina can have disposed of Grail. Extra importantly, the acquisition and divestment can have been a monetary catastrophe. Illumina will lose greater than all that they paid for it (when accounting for residual worth much less buy worth, authorized prices, capitalization of the spin-off, burn price, and so forth.). In different phrases, even when they obtained Grail totally free, they might nonetheless have misplaced cash.

10. Transgender remedy turns into the brand new abortion 

With Dodd’s choice offering a roadmap for delegating energy to the states to control abortion providers, we expect conservative states will take an identical strategy to ban transgender reassignment procedures. At the moment, four states have passed restrictive laws. We predict that 10 or extra states will comply with in 2023 and that opponents will tee up one other Supreme Courtroom showdown.

Even within the face of actual efforts by each Amazon and Apple, we’re doubling down on our 2022 evergreen prediction that “Huge Tech will proceed to be horrible at well being care.” We see no proof that Amazon Care, One Medical’s providers, or Apple’s {hardware} will change the outcomes or value curves considerably and are as bearish as ever concerning the prospects of Google, Microsoft, Salesforce, and new entrant Oracle succeeding in well being care. 

Regional Blue Cross/Blue Defend plans ought to, however won’t ever, merge to raised compete. This prediction is new and evergreen as a result of it’s each utterly apparent in a “scale trumps all” business and almost not possible to materialize. Non-profit standing plus “management concerns”, big stability sheets, native boards, cartel-like Blues governance, and state regulators trying to extract concessions imply this technique will solely emerge after it’s too late.

We look ahead to reporting again to you in a yr. For those who agree, disagree, or have ideas please attain out on Twitter at @bobkocher and @brobertsvc.  Within the meantime, we want you a secure and joyful vacation season and 2023.

Bob Kocher and Bryan Roberts are companions on the enterprise capital agency Venrock, the place they put money into well being care companies.

The opinions expressed in Fortune.com commentary items are solely the views of their authors and don’t essentially mirror the opinions and beliefs of Fortune.

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