Healthcare Dive's Outlook for 2022

Beleaguered and exhausted, the health sector marches into a third year of the pandemic.

For hospitals, it will mean continued pressure on profit margins as expenses climb due to a host of issues, including more expensive labor as clinical staff is in high demand. Ultimately, price hikes are likely as hospitals try to pass some of these higher costs on.

For payers, it likely means continued shifts in payer mix. Medicaid and Medicare coverage has swelled as policymakers have incentivized coverage as the nation recovers from the worst effects wrought by the pandemic. But as the emergency policies wane, it will likely cause disruption and payer mix fluctuations. And as people continue to put off care, that poses a risk to payers with a member base that is not only sicker but also has more advanced and complex illness.

Meanwhile, shifts in volume are likely to ebb and flow as COVID-19 cases rise and fall. A trend evident throughout much of the pandemic: Non-COVID volumes fall as hospitalizations balloon for COVID-19. It results in a tailwind for insurers while creating a headwind for providers. The amount of care people postpone more than outweighs what insurers spend on those hospitalized with COVID-19.

One of the takeaways from the pandemic is that when one part of the sector benefits, such as insurers, the inverse is true for providers.

Fluctuating payer mix

The COVID-19 pandemic served as a major stress test for the safety-net coverage that has been knitted together over the past decade thanks to the Affordable Care Act.

As the nation recorded historic job losses in the early parts of the pandemic, it did not result in a spike in the number of uninsured people as it had in previous recessions. In fact, the uninsured rate has held steady since 2019 despite the enormous upheaval across numerous industries.

Still, there have been fluctuations in enrollment trends. For example, Medicaid rolls have grown while employer-sponsored plans have recorded modest declines. Enrollment in Medicaid and the Children's Health Insurance Program hit 83.2 million members in June 2021, up nearly 18% from February 2020, before the worst of the pandemic's effects, according to government data.

Pandemic-era legislation also helped protect against coverage losses. States were barred from removing Medicaid enrollees from coverage during the duration of the public health emergency. The PHE is expected to end sometime this year and insurers are bracing for states to restart determining who is eligible for Medicaid coverage.

The redeterminations could result in another fluctuation to coverage in 2022, exposing Medicaid managed care organizations such as Centene and Molina to a decline in enrollment and a loss of revenue after recording membership gains in 2021. It's unclear how many Medicaid members will be booted from the program due to ineligibility.

On the flip side, some may be able to catch those customers through an ACA exchange plan. Many Medicaid members no longer eligible are likely to move to the exchanges "testing the links between the two programs," Massey Whorley, associate principal at Avalere, said in a recent presentation.

Labor constraints, rising expenses, margin pressure

Hospitals are staring down a difficult year of continued wage pressure as nurses are in high demand, desperately needed to respond to yet another COVID-19 surge. At the same time, traveling agencies are driving up wages as they lure nurses away from their traditional posts by offering significantly higher pay.

Meanwhile, morale among front-line staff is low due to high levels of burnout from an unrelenting workload during the pandemic, which now enters its third year. These dynamics have contributed to healthcare workers quitting their jobs.

"It's management's, No. 1, No. 2 and No. 3 concern at the moment," Kevin Holloran, senior director at Fitch Ratings overseeing nonprofit healthcare, said of the labor concerns, emphasizing the seriousness for providers.

For some hospitals, salaries, wages and benefits can account for anywhere between 45% to 50% of revenues — a massive cost item, Eric Axon, senior healthcare analyst for CreditSights, said. For hospitals, wage inflation "is going to be a persistent theme for the years ahead," Axon said in a recent webinar.

At the same time, hospitals will need to weather a host of other cost increases, including supply costs while inflation is climbing.

All together, this will likely squeeze hospitals' margins, experts have said, and will likely lead to price increases in the future as hospitals negotiate new contracts with payers.

As providers will likely try to pass these cost increases on, it will be more difficult for those with a payer mix that skews heavily toward government payers.

However, a considerable amount of cash on hand will help nonprofits offset margin pressure. Nonprofits' balance sheets "are currently showing unrestricted liquidity levels at virtually all-time highs … and that's going to give [them] a lot of cushion to absorb some of these losses," Holloran said.

Billions in provider relief funds helped prop up providers financially as volumes plummeted during the onset of the pandemic. But whether regulators plan to send the remaining funds to providers is still unclear.

"Will there be additional distributions? That's a question mark," Suzie Desai, director of nonprofit healthcare at S&P Global Ratings, said in a recent presentation.

Volume trends, ability to navigate through surges

Since its arrival, the pandemic has disrupted patient volumes, and much of that patient traffic is still below pre-pandemic levels.

This initially led to an explosion in telehealth visits, alleviating some concerns around the ability to readily access care during shutdowns and surges.

But insights into continued lagging volumes for certain services are raising some alarms. Putting off care can result in worse health outcomes for patients. Some oncology trends are raising a red flag.

Concerning breast cancer treatment, "at every step along the care journey, we're still not anywhere near pre-pandemic rates," said Lance Grady, leader of Avalere's market access practice, during a recent online presentation.

For metastatic breast cancer, "we're seeing screening biopsy, mastectomy and oncolytic treatment all down, and down substantially as most recently as November of 2021," Grady said, comparing a five-month period ending November 2021 to the same time period in 2019.

Mammography visits are down as much as 35% over that period, along with a 44% decrease in biopsy claims, according to claims data analyzed by Avalere.

Avalere's research takeaway — patients are sicker — has been echoed by hospitals and insurers who have all noted a higher acuity mix of patients.

These trends are poised to have a widespread effect on the industry, and pose a headwind for insurers, likely requiring them to spend more on patient care.

Meanwhile, providers will have to care for these patients while navigating through COVID-19 surges of their own.

As lawmakers seem less likely to impose shutdowns and force a pause on electives, providers will have to continue balancing the need to respond to COVID-19 upticks while also treating non-COVID-19 patients.

Surges can dent the ability to make money for providers as they crowd out other lucrative procedures. COVID-19 patients tend to use more resources, particularly during a surge, limiting both physical space and staffing resources.

Surprise billing ban compliance

Many surprise bills are no longer legal under major consumer protection legislation that went into effect at the start of the year.

Providers will have to come into compliance with the federal law, ensuring patients do not receive these types of sky-high bills that can leave them stuck between provider and insurer payment disputes.

Patients are now protected from surprise bills that originate from air ambulances, emergency services and non-emergency services at an in-network facility.

However, not all surprise bills are outlawed. Ground ambulances are not included and neither are urgent cares. Patients could also potentially receive a surprise bill after a lab is ordered by a primary care doctor.

Provider groups are challenging a segment of the law in federal court. The American Hospital Association and American Medical Association argue HHS' implementation of the law directly conflicts with what Congress had intended by "placing a heavy thumb on the scale" that favors insurers in the dispute resolution process.

There are three other similar suits that largely argue the same issue.

After a year of historic startup funding across every investment phase, from seed to late stage, some market watchers expect VC investment as a whole to moderate in 2022. Digital health could be no exception amid rising interest rates and as startups flush with cash eye next moves, including M&A or exits.

However, some expect funding levels to only continue rising, cheered by factors such as a healthy mix between first-time and existing investors marrying an infusion of new interest with continuing bets from digital health veterans, and moves from outside players — including deep-pocketed tech firms like Amazon and Microsoft — to invest and acquire in digital health.

In addition, the adoption of digital health products and services seems to be stabilizing, with sustained patient demand and no widespread rollbacks in virtual services from providers. That's ameliorating concerns that demand for such solutions would plummet once the brunt of COVID-19 subsides.

Digital health startups capitalizing on the need to manage costly, pervasive conditions, free up physicians and enable care at scale, along with the shift to individualized, high-touch medicine, are expected to bring in the lion's share of funding this year, experts say.

Barely a week into 2021, U.S. venture capital firms raised almost $13 billion, according to PitchBook data — about equal to what the firms raised in an entire year about a decade ago.

That money has got to go somewhere, and it's a good bet the healthcare sector will be a major recipient. The industry raised the second-highest amount of global venture funding in 2021, trailing financial services, according to Crunchbase data.

Health tech grabbed a serious share of the attention.

U.S.-based digital health startups brought in almost $30 billion in 2021, almost doubling the total investment the year prior. Investors and market watchers are wary on making firm forecasts that 2022 will break 2021's record, but most are eyeing the year through rose-colored glasses.

"I expect this positive momentum in deal flow to continue in 2022," said Ravi Kumar, a partner at professional services firm the Connor Group.

Market watchers see digital therapeutics, personalized medicine, provider-focused infrastructure and mental health and chronic condition management as particularly ripe for continued investment as the pandemic moves into its third year.

"It's hard to see what could stop it," said Marc Albanese, senior director of research for healthcare and emerging tech at market intelligence firm CB Insights.

Digital therapeutics and personalized medicine

Digital therapeutics saw significant funding growth in 2021, with startups delivering medical interventions using evidence-based software to manage and treat a broad spectrum of diseases reporting surging investments. It's a continuing trend: Investments in U.S. digital therapeutics companies have increased an average of 40% a year over the past seven years, according to McKinsey.

The goal of digital therapeutics is to treat chronic conditions at scale, alleviating some of the biggest stressors on the medical system right now, such as physician shortages, Albanese said. Digital therapeutics allows care delivery to disconnect, in a way, from the supply side, enabling patients to receive care asynchronously and remotely, without doctors having to constantly monitor the apps.

A number of factors are converging to spur investments in digital therapeutics. Coverage pathways for prescription digital therapeutics widened last year, allowing regulatory approvals to escalate. Startups are growing their body of clinical evidence to back up their technologies. There's also increasing buy-in from healthcare stakeholders, including payers and providers, around integrating digital therapeutics and building payment models around them.

Digital therapeutics were a huge highlight in 2021, but "when we think about the space, I think we're still in the early innings here," said Amanda DiTrolio, a healthcare intelligence analyst at CB Insights. A number of startups are still developing their therapies, and will likely search out additional infusions of cash to do so.

Two salient examples are virtual reality therapeutics and cognitive behavioral therapy apps, according to DiTrolio.

AppliedVR, a VR therapeutic for pain management, received breakthrough designation from the Food and Drug Administration early last year for its flagship product for treating fibromyalgia and chronic intractable lower back pain. It was the first FDA designation for a VR prescription therapeutic, and for many market watchers signals growing regulatory acceptance of the space.

"There's definitely excitement around that," DiTrolio said.

The analyst also noted that as digital therapeutics launch more clinical trials and expand into more indications beyond chronic care, like gastroenterology, IBS, women's health and neurodegenerative diseases, "that's going to require large sums of capital in the coming year."

Growing interest in providing more targeted care also is likely to help startups in the nascent personalized medicine space, according to Pitchbook emerging tech analyst Kaia Colban.

Colban predicts that personalized medicine startups, which use AI- and ML-based data platforms to glean insights into patient care and create personalized treatment plans, will receive a record level of VC investment in 2022.

It's a huge total addressable market with strong market drivers, including a confluence of technologies like remote patient monitoring devices, electronic health records, genetic databases and cloud computing, that are helping advance the state of such applications, according to Colban.

Mental health

When it comes to clinical indications, mental health is likely to continue raking in the bulk of funding.

Digital health startups offering mental healthcare raised $5.1 billion in 2021, almost double what they brought in the year prior, according to Rock Health. Investors will continue looking to fund tools enabling the delivery of mental healthcare at scale, CB Insights' Albanese said.

COVID-19 stressors on mental health are unfortunately unlikely to abate anytime soon as the virus becomes endemic. The pandemic's exacerbation of conditions like anxiety and depression has interlaced with a shortage of U.S. health professionals to create historic levels of demand for therapy and other treatments. Payments have also never been more generous, as employers and payers increasingly see the downstream value of proactively addressing their members' mental health conditions.

That's all spliced to result in a pandemic wave of new virtual care options for intensive mental and behavioral health needs. Well-funded startups in the space, such as Lyra Health, which raised $387 million last year alone, often pair traditional therapy options with wearables, targeted therapeutics, chatbots and other features to try to meet consumer expectations for preventive care, mental health coaching, therapy and medication.

One early-stage startup in the space to watch is Woebot, according to Pitchbook's Colban, a company that develops AI-based chatbot technology delivering mental healthcare through a digital therapeutic. Woebot has raised almost $130 million in venture funding to date.

Additionally, DiTrolio expects more funding to flow to startups targeting specific underserved demographics, including Folx Health, which offers virtual care for the LGBTQ community; Equip Health, which treats people with eating disorders; and Eleanor Health, a value-based startup targeting opioid abuse.

"The theme of targeting underserved populations really took hold in 2021, and there's plenty of room for more investment there," DiTrolio said.

Chronic condition management

Investors also are likely to continue boosting funding for chronic condition management startups that look to prevent downstream health complications, while recouping a share of any savings.

Rock Health has called out diabetes and musculoskeletal care as key funding arenas, as they're high-spend conditions that increasingly are managed virtually. Growth in startups managing such conditions could help lift some weight off the overtaxed physical health delivery infrastructure, as January COVID-19 hospitalizations break all-time records.

MSK funding, for example, grew sixfold between 2020 and 2021, when it reached $1.4 billion. Virtual MSK clinics like Hinge Health and Sword Health each completed multiple raises throughout the year, and that pace is unlikely to let up, analysts said.

Hinge alone has seen its valuation double in the past 12 months, making it the top-valued VC-backed retail healthtech startup — and a likely IPO candidate for 2022, according to Colban.

The focus on specialty care in general is also going to increase because of growing risk assumption, predicted Jacob Effron, a principal at VC firm Redpoint Ventures. As more healthcare companies take on risk, they'll need partners to help manage patients with more niche and high-cost conditions, according to the investor.

"I feel like I meet a different entrepreneur every week that's building in a different specialty area," Effron said.

Behind the scenes: Infrastructure plays

Investment in back-end infrastructure and interoperability startups has been consistently strong in past years, but appears to be accelerating. Such provider operations companies raked in more than a third of total seed and series A funding in the U.S. and Europe last year, up from a fifth in 2021, according to Silicon Valley Bank data.

VCs are likely to continue investing heavily in companies that help providers modernize processes like billing, coordinated care and research, following rising pressure to make systems more user friendly. That will benefit startups that can weave their tools into existing IT systems to streamline the experience of administrators, doctors and patients, reducing friction and cost, experts say.

"We're continuing to see strong, strong funding there. I would not expect that to go down," Albanese said.

Investments will increasingly be spurred by federal regulations mandating free electronic information sharing between disparate software systems and increased regulatory pressure for price transparency. The resulting emphasis on data interoperability and portability will cause more growth in digital health startups in that arena, Connor Group's Kumar said.

Other macro trends galvanizing investment include the emergence of more direct-to-consumer healthcare delivery options, putting health systems at risk of losing their most lucrative patients — the commercially insured. That trend incentivizes them to digitize their platforms and provide a better consumer experience across the board, whether it's scheduling, patient intake, communication or billing.

Growing interest in risk assumption is also causing providers to look increasingly for digital health solutions to help them take on and manage risk, which will cause funding to startups in that area to increase as well, according to Redpoint Venture's Effron.

"I think the shift to risk is probably the biggest macro trend overall. And I think the opportunity to build supporting tech and services around that to help physicians succeed in that new environment is probably the top area I'd expect provider tech investment in 2022," Effron said.

In addition, COVID-19 has exacerbated labor shortages and provider burnout, sending hospitals and health systems scrambling to improve workflow stressors on their employees, experts say.

It's a big opportunity for startups that received funding last year, including companies that integrate data streams into unified API ecosystems like Innovaccer, Redox and Ribbon Health; enable cross-company data analysis like TripleBlind and Truveta; streamline data structure and labeling like ScienceIO and Centaur Labs; provide building blocks to help others implement digital health tools like Commure, TruePill and Wheel; and offer healthcare-focused robotic process automation technologies like Olive.

Fintech

Billing also is an area to watch, as unsustainably increasing prices for healthcare services have dented the pocketbooks of many Americans even before the coronavirus. Hospitals already were running more financial assistance transactions before the pandemic, but COVID-19 accelerated the trend, boosting the financial pressure on providers and patients struggling with higher costs, according to credit bureau TransUnion.

Financial services was the leading sector for venture investment last year. Such startups operating in the healthcare space are likely to continue enjoying investor interest as consumers look for ways to pay for needed healthcare services without breaking the bank.

Startups offering technology to smooth filing and billing processes, as well as those attempting to ease the burden of payment on cash-strapped consumers, have reported breakneck growth in adoption and funding.

Buy now, pay later platforms, for example, allow consumers to make purchases on payment plans. San Francisco-based PayZen is one such startup operating in the healthcare space. PayZen, which raised $15 million in a Series A round in 2021 to expand its model, uses artificial intelligence to assess patient's ability to pay fees after insurance, then automatically creates a tailored payment plan for the patient and an automated system for the hospital to manage billing.

That leads to hospitals recouping a higher proportion of costs, without having to send patients to collections, PayZen says.

But whether you're a fledgling company combating pain points in medical billing or any other sort of digital health player, "there's never been a better time to start a digital health company," Effron said. "I think there will be a lot of interesting opportunities for investors in 2022."

COVID-19 threw the healthcare labor market into disarray, and it's unclear when it might get better — or how much worse it could get.

Hospitals are still grappling with rising turnover, widespread burnout and numerous staff members calling in sick nearly two years after the pandemic began. Now, healthcare workers are getting infected with the omicron variant and other seasonal illnesses like the flu or common cold, further stressing systems and their remaining staff.

A quarter of U.S. hospitals reporting their data to HHS said they faced critical staffing shortages in early January, according to the agency.

The rising pressure comes as hospitals are busier than ever, still treating COVID-19 patients, most of whom are unvaccinated and require longer stays, while other patients return for elective care they've delayed over the past two years.

Labor strains caused health systems to spend more on salaries, sign-on bonuses and traveling nurses during the third quarter when the delta variant surged, though executives at major for-profit hospital chains said they expected that to wane in line with past waves.

That hasn't quite happened.

Staffing shortages and labor expenses are the biggest near-term risk for most providers and will likely remain a challenge beyond this year, according to a Jan. 6 report on nonprofit hospitals from S&P Global Ratings.

"Although the healthcare industry has always had periods of staffing challenges, those ignited by the pandemic are more widespread, severe, and expensive to address," the report said.

Staffing shortages, burnout and the 'Great Resignation'

When a record 4.5 million people quit their jobs in November, healthcare and social assistance workers had the second highest quit rate at 6.4%, according to data from the Bureau of Labor Statistics.

Nurses in particular have reported burnout spurring them to consider leaving their jobs for other positions or leaving the profession altogether. But physicians, too, are reporting higher levels of burnout than ever before, a recent survey from KLAS Research's Arch Collaborative found.

That survey found the rate at which burnout is increasing accelerated sharply in 2021, especially from the second to third quarter as the delta variant took hold.

No industry is immune to the "Great Resignation," though it will look a bit different as it unravels within the healthcare sector, said Craig Laser, clinical associate professor at Arizona State University's College of Nursing and Health Innovation.

Healthcare jobs typically require more education, training and skill than retail or restaurant jobs, making quick replacements trickier to find when positions open up.

And the average age of a registered nurse in the U.S. in 2020 was 51 years old, a survey from the National Council of State Boards of Nursing found. That leaves the most senior and experienced nurses nearing retirement, with some leaving earlier than expected due to burnout, Laser said.

"You really only have the option of backfilling with more novice nurses," Laser said.

At the same time, generational differences between new and senior nurses are becoming more clear, especially in the way younger nurses view their careers and how they balance their jobs with other parts of their lives.

"They don't want the 12-hour shifts, they want shorter shifts," Kathy Kohnke, SVP of client relations at staffing firms Fastaff and U.S. Nursing, said.

Hospitals need to start looking at ways to gear the job more towards what early career nurses want or need, Kohnke said.

Hospitals working through travel nurse challenges

Labor challenges throughout the pandemic have raised rates for traveling nurse staff that have yet to abate. Some nurses are leaving permanent positions for those higher-paying, temporary positions.

From January 2020 to this month, advertised pay rates for travel nurses jumped 67%, with staffing firms billing hospitals an additional 28% to 32% over those pay rates, according to Proculent Health, a workforce data and technology company.

That's caused animosity between core nursing staff and traveling nurses who are often contracted to do the same work for a much higher paycheck, according to a report based on interviews with nurses from staffing firm Aya Healthcare in September.

One system is trying to overcome those hurdles with its own in-house staffing agency.

In December, the University of Pittsburgh Medical Center launched a program for its registered nurses and surgical technologists to take rotating six-week assignments at its hospitals across three states, depending on where need is greatest.

UPMC wants to rely less on outside agency staff, help retain current workers and potentially bring back those who've left amid nationwide shortages, the system said in a release.

Staff that have left for traveling nurse positions "really don't want to leave UPMC, but they're younger, they're mobile," John Galley, SVP and chief human resources officer for UPMC, said.

Younger nurses don't have as many attachments and can take those positions more easily, but most traveling nurses don't exclusively take temporary positions throughout their entire careers, Galley said.

UPMC's in-house program allows staff to work for the system and receive the same benefits as other permanent employees, including a pension plan, while allowing them to travel across the system's hospitals, "then come right back into our core workforce seamlessly," Galley said.

The system launched the program at the end of December and has hired 300 nurses and 13 surgical technicians so far, according to the executive.

More labor union activity likely

Last year brought a number of strikes from healthcare workers, similar to the first year of the pandemic.

Some major strikes include one among 800 nurses at a Massachusetts hospital that lasted nearly 10 months, and another among 2,000 nurses in Buffalo, New York, that lasted 40 days.

Also, a planned strike among tens of thousands of Kaiser Permanente members across Southern California was narrowly averted in December.

Those disputes centered around safer staffing measures, including nurse-to-patient ratios, stronger workplace safety protections and better wages to recruit and retain staff.

It's likely action from labor unions will continue with new COVID-19 variants and ongoing staffing shortages lending workers more leverage.

Most recently, healthcare labor unions including National Nurses United petitioned an appeals court to make the Occupational Safety and Health Administration's emergency temporary standard for healthcare workers during the pandemic permanent.

The ETS mandated hospitals and other healthcare facilities follow requirements around ventilation, physical barriers and other protections intended to reduce the transmission of COVID-19.

In the coming year many labor deals between hospitals and unions representing healthcare workers will expire, posing the risk of more strikes if the sides can't agree on new contract terms, a Bloomberg Law analysis of labor agreements found.

Some major deals expiring include one involving 19,000 workers at Kaiser Permanente in Central and Northern California in August, and another affecting 14,600 workers at the University of California in October, according to that analysis.