The Healthcare Dive Outlook on 2023

Providers will be forced to navigate a challenging year as they try to rein in expense growth fueled by pandemic-driven labor shortages.

This year’s outlook for a large chunk of the healthcare sector remains negative as inflation and pricier labor create difficult operating conditions for nonprofit providers, Moody’s Investor Service said. 

As a result, health systems and hospitals are likely to clash with insurers over desired rate increases to offset higher expenses and providers will look to increase their revenue as much as possible by bargaining for higher rates.

Even though insurers have fared better than their provider counterparts, companies are still expected to face some headwinds this year. Still, Fitch Ratings says the 2023 outlook for the insurance sector is neutral. 

A recession could also take a bite out of enrollment at the same time the government is poised to roll back consumer protections that kept millions enrolled in government-sponsored plans during the COVID-19 pandemic.

Losing members could put downward pressure on both the top and bottom line for insurers, analysts said.        

Providers likely to push for rate increases

How much will healthcare prices increase in 2023?  

“That's by far and away the number one thing that we all want to know about,” said Kevin Holloran, senior director of U.S. Public Finance at Fitch Ratings.

Providers feeling the pinch are going to fight for rate increases in contracts that come due this year, Holloran said, adding that the two sides are “wildly apart” so far, according to his discussions with providers. 

This year will be contentious as providers may opt to play hardball in bargaining for better prices and may walk away during negotiations, leading to out-of-network periods for patients, he said.

“It's going to be very bumpy, very contentious this year,” Holloran said, characterizing 2022 as a terrible year for most providers.

Unlike other industries, many healthcare providers were unable to raise rates as inflation soared to record highs. Providers are locked into multi-year payment deals with insurers, bolstering their desire for higher rates in coming years.

Labor pains continue

Labor shortages and pricey contract rates are continuing to strain providers, contributing in large part to mounting financial pressures.

High labor costs have made it harder for hospitals to post positive margins, Erik Swanson of hospital consultancy Kaufman Hall recently said in the firm’s latest flash report. 

“The big push is to get the agency contract labor costs out,” said Suzie Desai, senior director at S&P Global Ratings. 

Some of the nation’s most recognized health systems were dragged into the red last year, weighed down by increased labor costs, including Mass General Brigham, Cleveland Clinic and Intermountain Healthcare.  

The shortage is driven in part by burned out nurses who have left the bedside for other positions — or the industry entirely. Providers have had to turn to staffing firms to help fill the gap, with agencies commanding high rates amid demand to fill openings. 

Hospitals are not the only facilities short on workers. Effects of nursing home shortages are rippling throughout the sector. Patient hospital stays are unnecessarily longer as nursing homes struggle to take on more patients without more staff, serving as an added financial burden for hospitals. 

Eyes on utilization and commercial enrollment as possible recession looms

Some eonomists are expecting a recession to squeeze the U.S. economy this year and potentially spur job losses.

As a result, insurers may see a dip in enrollment, leading patients to think twice about seeking out healthcare services.

Health insurance coverage in the U.S. is tightly linked to employment, so job losses could pose a financial headwind for insurers if they result in coverage losses. 

Patients may be reluctant to spend money on copays and deductibles for healthcare services as the threat of a recession looms, especially as record-high inflation grabs a larger chunk of American paychecks.  

“Healthcare dollars are getting squeezed out of peoples’ budgets,” Jefferies Analyst Brian Tanquilut said.

Consumer confidence will also influence healthcare utilization, he added.

At one of the largest hospital chains, HCA Healthcare, volumes for this year are expected to be lower than historical averages, Tanquilut said.

However, the so-called tridemic — RSV, the flu and COVID-19 — could inflate volumes, especially if outbreaks are more severe. 

Medicaid enrollment expected to drop after pandemic protections end

Pandemic protections shielded millions from losing health insurance at the onset of the COVID-19 pandemic.

As a result, enrollment in Medicaid soared, increasing 27% to cover more than 90 million people, with states barred from removing people from the program due to the public health emergency.

Those pandemic protections are set to end in 2023, threatening to cut off access to care for millions. An estimated 5 million to 14 million are expected to lose coverage as states resume eligibility checks, according to the Kaiser Family Foundation.

For insurers like Centene and Molina, prior revenue gains, as a result of the pause on eligibility checks, are expected to deflate.

Analysts are keeping a close eye on how many members insurers will be able to convert from the Medicaid program to Affordable Care Act exchange plans.   

Home health push continues

Health insurers continued to place bets on the home health sector, an area that will remain a key focus in 2023.

“The crux of health insurance is keeping costs down,” said Dean Ungar, an analyst at Moody’s Investors Service. 

Home health aides have a unique advantage to temper costs by working in a member’s home, enabling them to ensure people are taking needed medications and checking on other factors that influence a person’s health.

“They can identify things that can prevent emergency room visits by just being proactive,” Ungar said. 

Some of the largest payers placed big bets on home health in 2022.

UnitedHealth Group signed a $5.4 billion deal to acquire home health provider LHC Group. The transaction is expected to close early this year.  

CVS signed an $8 billion deal to acquire home health provider Signify, beating out other potential acquirers, including Amazon.

These moves follow Humana’s bid for home health giant Kindred. Humana acquired the remaining stake of Kindred in 2021 for $5.7 billion. 

Medicare Advantage expected to surpass enrollment milestone

Medicare Advantage enrollment is expected to reach a milestone this year, exceeding 50% of the total Medicare population in 2023.

This change impacts providers too, as reimbursements rates can vary.   

Enrollment in MA plans has more than doubled since 2007, according to the Kaiser Family Foundation. Still, the program has faced continued criticism over financial incentives to make members appear sicker in order to increase monthly capitation rates.  

“I think the reason this is important is because it’s really a restructuring of the Medicare program,” said Jeannie Fuglesten Biniek of Kaiser Family Foundation. “As Medicare Advantage Plans play a bigger role, we see that there’s just a lot more variation introduced into what it means to have Medicare coverage.”

The COVID-19 pandemic kickstarted a rapid increase in adoption of healthcare technology, reshaping the bedrock of American medical operations and delivery. But as 2022 drew to a close, several factors suggested that technology adoption was slowing down, including a cooled landscape for digital health funding and a drop in virtual care utilization.

In addition, a flurry of cyberattacks and concerns over the privacy of sensitive medical data highlighted the hazards of new technology adoption.

Despite this, experts remain upbeat about the potential of technology to improve U.S. healthcare in 2023.

According to predictions from industry stakeholders, this year could represent an inflection point for real-world utilization of artificial intelligence, and standards could raise for health data privacy and cybersecurity. In addition, though investors are more cautious, funding will continue to be available for startups this year, and the telehealth industry will be held to higher clinical standards as it’s used more frequently in care delivery.

Digital health goes back to basics

After a volatile few years of record digital health funding followed by a painful market correction, health tech is going back to basics this year as investors prioritize safety over risk, experts predicted.

Digital health funding may still experience a slight drop compared to past years, but funding levels should stabilize in 2023, according to Credit Suisse analyst Jonathan Yong. Companies that have a pathway to profitability or are already operating in the black should attract the most interest as venture capitalists — with valuations down compared to the highs of the past two years — become more discerning.

“While growth is still important, there has to be a much stronger balance between growth and path to profitability,” Yong said. “VCs are going to be much more selective in their investment choices.”

That trend should benefit public companies with track records of stability, mature business models, steady growth trajectories and fair valuations, according to SVB Securities analyst Stephanie Davis. Such companies include data analytics company Health Catalyst, patient intake software provider Phreesia and revenue cycle management company R1 RCM, along with EHR companies like Veradigm, née Allscripts, and Nextgen, Davis said.

Mental and behavioral health should continue to be key areas for funding, Yong said. Despite the multitude of behavioral health companies in the space, employers and payers “are still looking for help here,” he added.

Family planning and femtech also are expected to draw in dollars amid a rising focus in women’s health accelerated by the Supreme Court’s decision to overturn Roe v. Wade in Dobbs v. Jackson Women’s Health Organization last summer.

Experts said they think healthcare companies will adopt tools more slowly than they did last year, as payers and providers are forced to be more selective in whom they work with given financial pressures and an abundance of point solution companies in the market.

Payers likely will allocate resources toward physician enablement and care coordination capabilities. Meanwhile, providers will invest in tools to reduce administrative burden on clinical staff and improve revenue cycle management, Yong said.

Digital health companies have the greatest near-term opportunity from the provider wallet, as hospitals and physician networks continue to adopt digital health technologies to streamline operations in a difficult macro environment, including data and analytics strategies and patient engagement products, Davis said.

Despite opportunities, this year still is expected to be tricky for digital health startups. Experts said persistent layoffs and consolidation is likely as it becomes harder for point solution companies to operate independently. In addition, companies that decide to raise funding in 2023 will likely have to make do with a down round, and may have a harder time getting funding as the year goes on and a higher rate environment pressures valuations.

“I’ve been hearing a lot of quiet down rounds lately,” Davis said. “And I do think the companies that are doing the down rounds are being very prudent to do so.”

Telehealth shifts to ‘more high-value’ care

Research suggests that telehealth use has been falling since it peaked in spring 2020. However, some telehealth experts predict that digitally delivered healthcare will continue to grow, with volume shifting from urgent care visits that popularized the modality to virtual care for chronic needs.

The drop in consumer utilization of telehealth has “been offset in a very, very significant way by a huge rise in the way clinicians are using telehealth” — like consulting specialists in other systems, delivering care for patients undergoing chemotherapy, or checking on patients after surgery, said Roy Schoenberg, CEO of Boston-based telehealth company Amwell.

Amwell has seen clinicians using telehealth for this “more high-value” chronic and longitudinal care increase every week, generating volume that Amwell expects to continue rising in 2023, Schoenberg said.

Telehealth is increasingly being used for “what most healthcare is about, which is chronic patient care, longitudinal patient care, rather than the whimsical occasional flu, which is a very, very small part of healthcare,” Schoenberg said. “When I look at 2023, I actually see a bull market for telehealth driven by the reimagination of how patients need to be cared for by clinicians.”

Virtual care will increasingly be held to the same clinical standards as in-person care, and this year will bring more emphasis on quality and safety, according to Teladoc Health CEO Jason Gorevic. Telehealth standards were a source of controversy last year, with some companies accused of operating as pill mills, resulting in regulatory scrutiny.

In addition, economic pressures and shifting consumer expectations will contribute to a decline in the number of digital health point solutions in the market, experts said, with Gorevic noting that he wouldn’t be surprised if half are acquired or shut down completely by this time next year.

2023 will also be a year of reckoning for care navigators, which educate patients about healthcare decisions or connect them to providers, but don’t provide actual healthcare.

“Employers are taking note and we expect to see a shift in buyer habits this year” as employers look for vendors that “resolve a need rather than steer the problem elsewhere,” Gorevic said in emailed comments.

An inflection point for AI

The healthcare sector has long been eying the potential for artificial intelligence in healthcare, but adoption of such tools in the real world has been slow. The number of randomized controlled trials, and the actual use of AI in medical facilities, remains small, but more evidence could start to emerge this year to help ease adoption, Google Chief Clinical Officer Michael Howell predicted.

“What I think we’ll see with this in 2023 is we’ll start to see some high-quality evidence come out about the impact of AI and ML on actual health outcomes and on healthcare processes,” Howell said. “The question I always get is, ‘Will AI ever replace doctors and nurses?’ No. But will it start to augment and support them? I think we’ll start to see real examples of that.”

The Food and Drug Administration has been accelerating approvals of medical artificial intelligence tools, authorizing more than 520 devices as of November.

As more devices are approved, more providers will weave AI into their operations for uses in revenue cycle management, clinical decision support and patient engagement, experts predicted.

Payers will also look to find efficiencies using technology and discover new ways to use data they collect, as healthcare organizations struggle with the growing disconnect between consumer expectations and the reality of the healthcare experience — and competition from market entrants like Amazon and Walmart, according to a report from digital consulting firm West Monroe.

Healthcare companies get serious on cybersecurity, privacy

As healthcare organizations continue to adopt technology, attack surfaces will expand, increasing the need to secure the cyber environment, according to Chris Bowen, founder and CISO at data security firm ClearData.

For example, the number of ransomware attacks on hospitals more than doubled between 2016 and 2021, according to a recent study. Researchers estimated more than 42 million patients’ data was exposed over those five years.

As a result of rising incidents, healthcare organizations will increase their cybersecurity budgets, in some cases by more than 15% compared to 2022, Bowen predicts. Federal law enforcement also may become increasingly aggressive in combating cyberattacks, especially ransomware.

In addition, policymakers may get more serious on data protection laws as biometric and AI-driven healthcare technologies become more pervasive, according to Bowen. The lack of a comprehensive federal data privacy legislation is viewed as a major oversight in today’s digital age, and the HIPAA privacy legislation has notable gaps in the data it protects.

“It's unsettling that mobile app creators can collect health-related data that does not have federal data protection,” Bowen said.

Google’s Howell agreed that data protection and trust will be pivotal this year as a national conversation around privacy sparked by the overturning of Roe v. Wade stretches into 2023. In the wake of the ruling, a number of period tracking apps, data brokers and tech companies like Apple and Google took steps — often under regulatory and public pressure — to enhance privacy and security protocols.

Companies that operate in the healthcare industry will continue working to ensure patient data is kept secure and build trust with patients wary over the collection and use of their sensitive medical data, according to Howell.

“We will keep focusing on those,” Howell said.

The nation’s healthcare workforce still is trying to recover from the COVID-19 pandemic nearly three years after it began as labor shortages stress hospitals and clinicians, spurring increased burnout among staff ranging from nurses to executives.

In addition, healthcare workers across the country have waged strikes to gain higher pay and optimal staffing conditions in employment contracts, while resident physicians increasingly have been involved in labor organizing.

These labor trends will continue posing challenges to health systems this year as facilities work to get back to pre-pandemic operations and stem labor costs that rose last year, experts say.

Ongoing staffing shortages and use of temporary labor

Staffing shortages are expected to continue this year, especially among nurses, as widespread burnout and increased turnover hits the sector. Shortages have led to ongoing use of costly contract labor to fill labor gaps even as severe COVID-19 hospitalization rates have declined.

In December, the national average weekly pay rate for travel nurses was $3,173, according to data from nurse staffing platform Vivian Health. That’s up from $1,894 in January 2020.

High rates are expected to remain fairly static this year, said Tim Needham, senior vice president of revenue at Vivian Health.

Without another COVID wave, demand for contract labor costs this year should normalize at about 60% higher than 2019 levels, Jefferies analysts said in January healthcare equities brief.

Persistent heightened labor costs are posing financial challenges for systems. Although some are boosting permanent staff pay to attract needed workers, many have still been unable to curb soaring labor costs.

“The cost differential between full-time staff and then contracted staff is continuing to put pressure on health systems to reassess their full-time employee compensation packages,” Needham said.

An increase in organizing among residents and interns

Healthcare workers in all roles have been active on the labor front throughout the pandemic in an effort to improve working conditions.

While nurses have long been the face of union activity, resident physician organizing has picked up in recent years, according to the Committee of Residents and Interns, a branch of Service Employees International Union.

The fast-growing union representing doctors in training had five election wins in 2022, four in 2021, one in 2020 and two in 2019, according to CIR-SEIU. It currently represents about 25,000 members.

Organizing for doctors in training is expected to continue in the new year, with residents at Montefiore Medical Center in New York and Lifelong Medical Care in San Francisco currently entering an election for union representation, according to the union.

Last year, residents at three Los Angeles County hospitals and one Oakland, California-based hospital authorized strikes, though both groups reached deals with the systems beforehand and averted a work stoppage.

Strike threats from resident physicians are particularly tricky for hospitals because residents are more difficult to replace than nurses. Additionally, resident physician strikes threaten a facility's ability to keep operations afloat in the event of a walkout, said John August, director of healthcare labor relations at Cornell’s School of Industrial and Labor Relations.

Like nurses and other healthcare workers, unionized residents are pushing for better pay and adequate work support.

“Doctors are feeling that they've kind of turned a corner — for many years, they felt that their power and influence was being reduced due to consolidation of health systems and reimbursement systems and technology,” August said.

Burnout, turnover hits executives

Reports first pointed to burnout hitting nurses and physicians as healthcare workers reporting feeling stressed and emotionally exhausted.

Now, even healthcare executives are reporting symptoms of burnout, leading some to consider career changes.

A December study from consulting firm WittKieffer found that nearly 75% of surveyed healthcare executives reported feeling burned out during the last six months of 2022, compared to 60% of respondents who reported burnout symptoms in 2018.

The survey, which included responses from 233 healthcare executives, also found that executives felt significantly less productive and unable to overcome challenges at work, and were less determined to make an impact in their careers.

Increased overall burnout in the sector may lead to greater executive turnover, an effect which has been recorded among nurses.

Still, a number of executives currently leaving their posts likely delayed retirement in order to weather their organizations through the pandemic, according to Rachel Polhemus, a senior partner at WittKieffer's Healthcare Practice.

“Each wave presented a different set of factors that really created an element of ‘I'm ready to step away and let a new leader come in and lead,’” Polhemus said.

Additionally, replacing executives could prove trickier post-pandemic.

“The skill sets and competencies organizations are looking for in executives are different than they were pre-COVID,” Polhemus said.

Hospitals are placing added value on candidates with past experience in executive roles dealing with crisis management during the pandemic, Polhemus said, adding that job-seeking candidates also are looking at how organizations fared through the pandemic when deciding whether or not to accept offers.