The 2023 U.S. Healthcare Forecast

What to expect in US healthcare in 2023 and beyond

McKinsey & Company recently published its “What to expect in US healthcare in 2023 and beyond,” and it is a good news, bad news forecast. Cited are the challenges the healthcare industry is facing, notably continuing inflation and persistent labor shortages. McKinsey, however, is projecting that healthcare profit pools will grow at a 4 percent compound annual growth rate (CAGR) from $654 billion in 2021 to $790 billion in 2026. Certain segments will realize higher growth including Medicare Advantage within payers, ambulatory surgery centers within providers, software, and platforms such as those involving patient engagement and clinical decision support, and specialty pharmacy within pharmacy services. Declining growth is projected for general acute care and post-acute care within providers and Medicaid within payers. In addition to inflation and labor shortages, two other factors are expected to have a direct impact on the healthcare industry’s profit pools.

Payer Mix Changes and Endemic COVID-19

The McKinsey report noted that there will be changes in the payer mix. Specifically, expect a major shift toward Medicare due to the 3 percent increase in the over 65 population and growing popularity of Medicare Advantage plans as reflected in the Centers for Medicare & Medicaid Services (CMS) enrollment data. Medicaid enrollment, on the other hand, is projected to decline by an estimated ten million lives over the next five years due to new legislation allowing the states to initiate eligibility redeterminations which were halted during the pandemic. Speaking of COVID-19, it has moved into an endemic stage which could generate U.S. healthcare costs of approximately $200 billion annually relating to long COVID treatments and the prevention and treatment of new COVID-19 cases.  Within the Medicare Advantage sector, the estimated profit pool is projected to be 50 percent higher than the commercial sector by 2026 (i.e., $33 billion vs. $21 billion) with Medicare Advantage penetration expected to be at 52 percent in 2026. The commercial sector’s earnings before interest, taxes, depreciation, and amortization (EBITDA) margins is expected to return to their historical levels by 2026 with profit pools reaching $21 billion reflecting a CAGR of 15% from 2021 to 2026.

Provider Profit Pools

Provider profit pools are now forecast to grow at a 3 percent CAGR from 2021 to 2026 due to increased costs stemming from inflation, as well as labor shortages. Provider profit pools will remain under pressure from these factors with their total EBITDA falling by 25 percent from 2021 to 2023, dropping to $235 billion. A projected rebound, however, is expected from 2023 to 2026 to a total EBITDA of $358 billion by 2026.

Pharmacy Services, Healthcare Services and Technology

The growth in specialty drugs will drive further growth in pharmacy services. McKinsey’s latest estimates are for pharmacy services to experience a 3 percent CAGR from 2021 to 2026 with profit pools climbing from $55 billion in 2021 to $65 billion by 2026.

Healthcare services and technology profit pools are projected to be at $49 billion due to wage inflation and the “drag” of fixed technology investment that has not yet reached its full benefits.