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.”

 

Upcoming Medicaid redeterminations could further complicate healthcare operating environments, as hospitals and payers continue to face pandemic-driven challenges nearly three years into COVID-19, according to a new report from Moody’s Investor Services.

Medicaid enrollment rose substantially through the pandemic, growing from 70.7 million members in February 2020 to 90.9 million in September 2022, according to the report. The growth in enrollment numbers was driven by policies that suspended state Medicaid eligibility checks during the COVID-19 pandemic and barred states from kicking members off their rolls.

The suspension of state eligibility checks benefited both hospitals and payers, with seven Moody’s-rated publicly-traded health insurers reporting large enrollment and EBITDA numbers driven largely by pause, according to the report.

However, Medicaid state redeterminations are currently scheduled to begin in April. About 15 million people are expected to lose coverage as a result over the next two years, according to the HHS.

While about seven million of those people are expected to gain coverage through the individual markets or employer-sponsored plans, eight million will not, and will likely become uninsured.

As a result, the redeterminations are likely to curb hospital revenue and enrollment growth for payers, according to the report. Health insurers’ earnings growth is expected to slide due to sluggish enrollment, while hospitals could see more self-pay patients and “higher bad debt” for facilities.

Commercial insurance enrollment is also likely to slow as corporate layoffs rise. That’s another factor likely to deal a blow to payers, Moody’s said.

Large payers have addressed redetermination concerns along with recent earnings results. On a Wednesday call with investors, Elevance CEO Gail Boudreaux said the payer will work with states to minimize potential coverage losses once redeterminations start again. Elevance has benefited from relaxed eligibility rules, and ended 2022 covering 47.5 million members.

Hospitals also face additional concerns this quarter, Moody’s said.

Staffing shortages remain a primary concern for facilities, though contract labor use has been declining in most markets, according to the report. However, labor expenses — which account for the bulk of hospital expenses — are likely to remain elevated as facilities face rising permanent labor costs.

Staffing and pay concerns among nurses have led to major strikes in the past year, including a recent three-day walkout among 7,000 nurses at two New York hospitals.

Greater union activity is likely to occur in some markets as labor dynamics continue playing out, the Moody’s report said.

Labor shortages have also hurt hospital volumes and are leading to longer lengths of stay as facilities struggle discharging patients to post-acute care settings.

 Some hospitals have acquired or partnered with post-acute care facilities to enhance discharge processes, in line with an ongoing shift toward non-hospital care. That trend should continue disrupting hospital volumes, according to the report. 

Dive Brief:

• CVS is partnering with Rush University health system in Chicago to coordinate care for Medicare seniors in a new accountable care organization based off CMS’ direct contracting model.
• Under the new partnership, patients getting care at MinuteClinics participating in the ACO REACH model in the Chicago area can get follow-up primary and specialty care with Rush, along with other ACO REACH organizations, CVS said in a release Monday.
• Rush will be the only Chicago-area academic medical center participating in CVS’ first accountable care organization in REACH.

Dive Insight:

The goal of the initiative is to strengthen care coordination for patients in a convenient way, according to Rush CEO Omar Lateef. Medicare patients will be able to get customized support, including home-based care, transportation support for annual wellness visits and cost sharing to help with co-pays.

“This provides another option for patients at a time when access to high-quality health care is more important than ever,” Lateef said in a statement.

The partnership builds on Rush’s experience with the Medicare Shared Savings Program, the biggest accountable care program in the U.S., CVS said. According to Mohamed Diab, the CEO of CVS’ accountable care division, it has the potential to improve longitudinal care for Rush’s population of 35,000 Medicare beneficiaries.

CVS joined ACO REACH in 2022, when the model was still known as direct contracting, and was grandfathered in to participate in REACH for the 2023 plan year. The company, which owns health insurer Aetna, covers beneficiaries in REACH in the states of Florida, Georgia, Illinois, Indiana, Kansas, Missouri, North Carolina and New York.

CVS covers more than 80,000 aligned beneficiaries in ACO REACH across more than 4,000 providers, and more than 800 MinuteClinic locations, according to its website.

The company has said it’s looking to acquire a primary care provider as it looks to create a vertically integrated healthcare giant comprised of a health plan, pharmacy, medical clinics and more. Bloomberg reported earlier this month that CVS is exploring a $10 billion deal to purchase value-based medical group Oak Street Health, though speculation has eased amid reports that the deal wouldn’t make sense for CVS financially.

Healthcare giant UnitedHealth Group beat analyst expectations for the fourth quarter of 2022 with revenue of $82.8 billion, up more than 12% year over year, according to results released premarket Friday.

Industry experts have expressed concern about potential recessionary pressures and upset care utilization patterns headed into 2023. But UnitedHealth's earnings, which are considered a bellwether for the health insurance sector's performance, may prove to be a positive sign for payers.

In a call with investors Friday morning, UnitedHealth CEO Andrew Witty characterized the state of the company as bringing “a ton of momentum into 2023.” Looking forward, UnitedHealth expects standout trends for the company to include growth of UnitedHealthcare’s membership rolls, an increase in fully capitated lives in value-based care business Optum Health and an acceleration of Optum Insight’s integration with Change Healthcare.

UnitedHealthcare’s revenue grew 12% year over year to top $63 billion in the quarter. The health insurance segment ended the year with 51.7 million members, a growth of more than 1.2 million over the year, led by UnitedHealthcare’s community-based and senior offerings.

Witty said UnitedHealthcare anticipates adding another “million plus” members by the end of 2023.

The payer’s medical loss ratio of 82.8% was slightly higher than analyst expectations, partially due to a high respiratory season.

“We certainly saw that [flu] spike. We have now seen that start to wane for I think five consecutive weeks here moving forward,” UnitedHealthcare CEO Brian Thompson told investors.

UnitedHealthcare is “sort of out of the zone of these unknowns” and back to expectations it had pre-pandemic when it comes to seasonal trends, Thompson said.

“There was a bit more flu and respiratory disease but really I’d say immaterial,” Witty said. “The little elevation we saw was somewhat in the range of what you’d expect to see in a normal Q4.”

Optum, UnitedHealth’s health services business, reported revenue of $47.9 billion, up 17% and higher than analysts expected. Value-based care unit Optum Health drove the bulk of the performance, while data analytics arm Optum Insight came in slightly below expectations.

Optum Health’s revenue per customer served increased by 29% in 2022, as value-based care contributed to Optum’s revenue growth.

“Optum Health margin upside was notably large, despite the strong flu season ([value-based care] risk bearing would theoretically be hit by that),” Jefferies analyst David Windley commented in a note on the results.

Optum Health plans to add new regions and deepen its presence in existing areas in 2023, as UnitedHealth makes significant investments in its clinical network, care coordination, home capabilities and more, COO Dirk McMahon said.

Optum Health has seen “really rapid growth of value-based fully capitated lives,” Witty said. The CEO said he expects the number of lives in fully capitated arrangements to “more than double” by the end of 2023.

Meanwhile, UnitedHealth plans to accelerate its investments in healthcare technology to bolster Optum Insight, CFO John Rex told investors, adding that he expects the company to make a significant portion of investments in the first half of 2023.

The unit is currently integrating Change Healthcare, which UnitedHealth bought in a $13 billion deal that closed in October. The buy encountered regulatory scrutiny and is now facing an appeal from the Department of Justice.

UnitedHealth plans to actively pursue M&A across the board in 2023, according to the CEO. “We have a substantial number of transactions in progress as we speak,” Witty said.

CFO John Rex declined to comment on what areas of M&A the company is pursuing, only that deals would be in line with ongoing company priorities like value-based care capabilities.

For full-year 2022, UnitedHealth brought in revenue of $324.2 billion, up 13% year-over-year. Profit of $20.6 billion — UnitedHealth’s highest bottom line ever — was up 16%. The Minnetonka, Minnesota-based company on Friday affirmed its 2023 outlook set at its November investor conference, expecting full-year revenues between $357 billion and $360 billion.

Dive Brief:

• Omada Health is partnering with Intermountain Healthcare’s value-based care unit Castell in the virtual chronic care company’s first care delivery partnership with a major health system.
• The two are linking to offer virtual diabetes care and prevention to Intermountain’s primary care patients in its Utah medical group. Castell will help to target and enroll eligible patients with or at risk for diabetes, giving them the option to enroll in an Omada program, according to a recent release.
• Omada expects to reach “thousands” of known patients in the new partnership, CEO Sean Duffy told Healthcare Dive. Financial terms of the deal have not been disclosed.

Dive Insight:

Omada was founded in 2011 with the goal of targeting care for the tens of millions of adults with chronic care issues, including the 11% of the U.S. population with diabetes.

The company started selling diabetes care management to employers and health plans, but its clinical areas have grown to include hypertension and musculoskeletal issues. Now, with the new partnership, it’s branching out into integrated virtual care with health systems as well.

The extension comes as the pandemic prompted many health systems to accept virtual care. And, as macro forces like inflation and labor shortages continue to pressure operators, hospitals are expected to continue adopting digital tools to streamline operations and care delivery.

Omada’s diabetes programs link member support with intervention from health coaches and medical devices, like continuous glucose monitors, to track progress on metrics like A1C levels in real-time. They also include an individualized care plan that uses behavioral science to encourage patients to make beneficial lifestyle changes.

Intermountain and Omada had a relationship for more than six years before launching its new partnership at the end of 2022, Duffy said. He didn’t share a timeline for the deal, but said he is “looking forward to continuing this partnership to enroll as many patients as possible and keep them engaged for as long as they need.”

In February, Omada closed a $192 million Series E financing round, with Duffy telling Business Insider and other outlets that the company was gearing up for an IPO at the end of 2022. However, the public offering failed to materialize.

Dive Brief:

• Employers and private insurers paid 224% of what Medicare would pay for the same services at the same facilities across all hospital inpatient and outpatient services on average in 2020, according to a Rand study funded by the Robert Wood Johnson Foundation.
• Researchers found significant variations in those prices across states. For instance, Hawaii, Arkansas and Washington had relative prices below 175% of Medicare prices, while other states like Florida, West Virginia and South Carolina had relative prices at or above 310% of Medicare.
• Price variations by state are more attributable to hospital market power than each hospital's share of patients covered by Medicare or Medicaid, according to the report released Tuesday.

Dive Insight:

The findings illustrate just how broadly prices for healthcare services can vary based on a patients’ insurance coverage and which state they receive care in.

Despite recent price transparency regulations designed to help consumers shop around for services, employers that provide most private insurance often don't have usable information on prices negotiated with hospitals on their behalf, researchers wrote.

About 157 million Americans got health coverage through an employer or union in 2020, according to data from the Kaiser Family Foundation.

The latest figures are a slight improvement from Rand’s previous 2018 study, when employers and private insurers paid 247% more on average than Medicare for the same services and the same facilities, according to the report. That’s mostly attributable to a boost in the volume of claims from states with prices below the previous mean price, the researchers said.

For COVID-19 hospitalizations, employers and private insurers paid on average 241% more than what Medicare would pay in 2020, the report, based on claims data from over 4,000 hospitals and over 4,000 ambulatory surgery centers in every state except Maryland, found.

Researchers also found variations between different sites of care.

Looking at five common procedures done in both ambulatory surgical centers and hospital outpatient departments, the average price in the outpatient department was $6,169 while the average ASC price was $2,404.

While commercial prices for ASC services rose slightly faster than Medicare prices over the study period, they remained well below relative prices for the same services in hospital outpatient departments.

Employers and private insurers paid about 162% more than Medicare for common outpatient services done in ambulatory surgery centers.

But if ASCs were paid the same as hospital outpatient departments in Medicare, the prices for those services would have averaged 117% of Medicare payments, the study found.

The American Hospital Association pushed back on the findings, saying “researchers should expect variation in the cost of delivering services across the wide range of U.S. hospitals — from rural critical access hospitals to large academic medical centers,” according to a statement from CEO Rick Pollack.

The AHA also said the report looks at 2.2% of overall hospital spending, and the average price for hospital services declined as Rand added more claims in the latest report compared to past reports. Pollack said in the statement “you simply cannot draw credible conclusions from such a limited and biased set of claims.”