2023 Outlook for Health Care and Life Sciences: Necessity Is the Mother of Invention | Deloitte US has been saved
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By Asif Dhar, M.D., US Life Sciences & Health Care leader, Deloitte Consulting LLP
Over the past couple of months, I’ve been talking to various media outlets about the effect inflation is having—and will likely continue to have—on health care. While inflation appears to be stabilizing, it feels like we are spending more on just about everything. Groceries are more expensive than they were a year ago, going out to eat costs more, and many holiday gifts had bigger price tags.
Inflation is a top concern for consumers and for the health care and life sciences sectors (see Inflation signals unrest ahead for health care). According to our latest consumer survey, 28% of surveyed respondents (roughly 72 million US adults) feel less prepared to pay for unexpected medical costs than they did a year ago. In addition, more than three out of four health care and life sciences executives expect inflation and affordability will have a major impact on their organizations this year, according to a recent survey. The results are based on a survey of 131 C-suite executives from large health systems, health plans, pharmaceutical companies, and medical device manufacturers, conducted by the Deloitte Center for Health Solutions.
Health care costs have historically increased faster than the rest of the economy. However, that is not the case today. While overall inflation is growing by about 8.5%, according to the US Bureau of Labor Statistics, health care costs are rising at a far slower rate. As a result, many hospitals, health systems, and physician offices are struggling to make ends meet.1 Wage inflation and higher costs for supplies have added more pressure on profitability. In addition, the increased cost of capital, combined with under-performing financial markets, has had a negative impact on some investment portfolios. In her 2023 Outlook for Health Care, my colleague and health care sector leader, Tina Wheeler noted that a majority of hospitals and health systems are operating at a negative margin. If this continues, the sector could face an unprecedented profitability crisis. Additionally, a burnout crisis and clinical talent shortages could drive even more cost and delivery challenges (see our new report, Addressing health care's talent emergency).
Pete Lyons, our national life sciences sector leader, explained in his 2023 Outlook for Life Sciences that the higher cost of consumer goods could prompt some people to put off non-emergency or elective procedures. While this will likely be a challenge for some of our medtech and biopharma clients in 2023, Pete saw plenty of opportunity, too.
The COVID-19 pandemic created enormous challenges for the health care and life sciences sectors. Many of those challenges are ongoing. But necessity is the mother of invention. Health care and life sciences incumbents might need to make significant changes to effectively traverse the shifting landscape and to keep pace with changing consumer/customer demands, digital transformation trends, and the need to do more with less. As these organizations transform themselves, they could usher in the Future of HealthTM much sooner than I or any of my colleagues could have predicted just a few years ago.
Seven trends to watch in 2023
I recently recovered from a mild bout with COVID-19 (it was during the World Cup, so I didn’t mind isolating at home…with my TV). A few months earlier, cold symptoms prompted me to visit my local pharmacy to buy some COVID-19 rapid antigen tests. I was going to pay for the tests out of pocket, but the cashier explained my insurance would cover the cost. I should have realized that. At the time, I was exhausted and focused on getting my test so I could get home as quickly as possible. Consumer-focused organizations that can help people navigate the physical and virtual ins and outs of the health care labyrinth—and help them avoid or prepare for unexpected health care costs—could be the ultimate winners in the year and years ahead. Disruptors from outside of the health care space continue to gain a foothold in the market and promise to streamline workflows, reduce cost, and improve the consumer experience. As a result, we could see new care models, platforms, and ecosystems.
Here are seven trends I believe can help shape the health care and life sciences sectors this year:
1. Hybrid health could become a winning care model: Higher prices for everyday goods and services could cause some people to delay routine and preventive care, such as cancer screenings.2 This could exacerbate some health issues and lead to more high-cost medical expenses in the future. However, provisions included in the federal government’s $1.7 trillion omnibus spending package could help sustain the use of virtual health for certain services by extending temporary rules enacted during the pandemic.3 Even before inflation hit, the consumer uptake of virtual health visits had increased from 22% in 2018 to 44% in early 2022, according to the Deloitte Survey of US Health Care Consumers. Nearly two-thirds of people surveyed who have had a virtual health care visit cited convenience (38%) or cost (27%) as the top reasons for accessing virtual health tools (see Tapping virtual health’s potential). In 2023, I suspect we could start to see a streamlined model of care that combines traditional, virtual, and alternative sites of care (e.g., retail clinics, urgent care centers). For this hybrid model to succeed, however, traditional health care stakeholders will likely need to work with retailers, technology companies, and other non-traditional companies that are entering the health care space.
2. Collaborations and acquisitions could lead to new health ecosystems: 2022 was a year of significant merger & acquisition (M&A) activity for traditional health care organizations and for consumer-focused technology companies that are making inroads into the health sector. Technology companies, national retailers, and large pharmacy chains spent billions of dollars to acquire urgent care companies, home health providers, and health centers. While there were a record 2,379 M&A deals last year (up 6% from 2021), the announced value of those deals dropped 47% to $250.8 billion.4 Higher interest rates and volatility in the stock market could lead to a decline in M&A activity as sellers become reluctant to transact at lower valuations. However, long-term trends in health care (e.g., increased consumerism, a migration to value-based care, and digital transformation) could drive continued collaborations and consolidation among existing players and new entrants. This could lead to new health ecosystems.
3. Trust may become the new currency for health care: Over the past few years, we have seen that trust often defines the adoption of new care models and new products. Trust can also have a significant influence on health care decisions. For example, 63% of consumers surveyed are willing to switch providers if they don’t like the way their doctor communicates, according to our research. Moreover, about half of the people who participated in a consumer focus group said they’d be willing to trade in-person visits and the convenience of a closer location for a provider who relates to them and understands their needs (see Rebuilding trust in health care).
4. Some organizations might re-evaluate investment strategies: Innovation in health care and life sciences can be prohibitively expensive. Investment capital has become even more expensive lately due to high interest rates and inflation. This could cause some companies to take a more conservative posture when it comes to investments. Some startup companies might need access to capital to have sufficient product-development runway. Additionally, technology investments (e.g., artificial intelligence, IoT, cloud), which are essential for digital transformation, could be delayed. Avoiding potential delays could trigger new strategic partnerships for companies that want to develop new platforms and broad-range capabilities. Additionally, focus on climate, sustainability, and equity is important, but it is also a useful financing lever: Some of our clients are paying closer attention to environment, social, and governance (ESG). Finance and treasury teams might look to restructure capital and secure ESG bonds, which can offer more attractive rates. I know of several organizations that have invested in climate and health equity because it is the right thing to do.
5. Health equity won’t be seen as a side hustle: Health inequities cost the US about $320 billion every year, according to our report on the Economic cost of health disparities. While not everyone is directly affected by health inequities, the avoidable costs can affect us all to the tune of about $1,000 per person per year. That amount could triple if health inequities aren’t addressed, according to Deloitte’s actuarial analysis. This could be the year that we begin to unlock that value proposition with the development of new care models and ecosystems. In his 2023 Outlook for Health Equity, my colleague Jay Bhatt predicted that health care and life sciences organizations would continue efforts to make health care more equitable for everyone. Jay heads the Deloitte Health Equity Institute as well as the Center for Health Solutions. Many of our clients, he wrote, are beginning to integrate health equity into their growth, financial, operational, and quality strategies. I agree and anticipate health equity will become integrated into the core business strategy for more health care and life sciences companies this year. As ESG gains traction among life sciences and health care firms, core operations, supply chain, manufacturing, facility management, and talent might all be considered for re-evaluation under a health equity lens. (Deloitte is co-chairing the World Economic Forum’s Global Health Equity Network this month in Davos, Switzerland.)
6. More convenient and diverse clinical trials could improve equity: The same national pharmacy chain where I got my COVID-19 tests is beginning to recruit people from the community to participate in clinical trials. Community-based retail clinics could become the next frontier for clinical trials. According to Deloitte’s report, Enhancing clinical trial diversity, some biopharma companies are working to leverage digital solutions, and are partnering with retail pharmacies and other community-based sites, to help make their trials more convenient, accessible, and inclusive. Community-based organizations tend to be highly trusted and could be well positioned to educate patients about clinical trials. Moreover, the omnibus package includes provisions aimed at modernizing and improving clinical trials. For example, the legislation requires the Food and Drug Administration (FDA) to require sponsors to file diversity action plans alongside phase 3 trials that are submitted to the agency. The law also requires the FDA to finalize its guidance on clinical trial diversity.5
7. Collaboration could be key to return on assets (ROA): If there was a COVID-19 lesson for life sciences organizations, it was that collaboration can be the key to unlocking value for customers and patients. Many organizations that collaborated with competitors saw a meaningful increase in their ROA (see Measuring the return from pharmaceutical innovation). Life sciences organizations that go back to business as usual could see a negative impact on future returns. The pandemic also showed the need for medtech and biopharma companies to become more digital and/or more consumer focused. I expect some life sciences organizations will continue to collaborate with each other given the benefits they realized after the pandemic emerged. In addition, the 2022 Inflation Reduction Act (IRA) could create new opportunities for biosimilars by requiring the US Department of Health and Human Services to negotiate drug prices for a small number of single-source brand-name drugs or biologics without generic or biosimilar competitors that are covered under Medicare Part D (starting in 2026) and Part B (starting in 2028).
The slower pace of health care inflation appears to be having an impact on consumer behavior. According to our research, consumers are worried not just about the price of health care, but also the money in their pocket. This could cause them to focus more on convenience and affordability in their health care decisions…and those decisions will likely affect health care and life sciences companies. The proverb, necessity is the mother of invention, is based on the Greek philosopher Plato, who wrote, “our need will be the real creator.” In the three years since COVID-19 emerged, health care and life sciences leaders have lived this proverb. Those that created and invented will likely emerge stronger as the health care system undergoes a transformation.
Watch our 2023 Life Sciences and Health Care Outlook Dbriefs webcast on-demand.
Latest news from @DeloitteHealth
1 Industry Voices—US hospitals face unprecedented challenges, Fierce Healthcare, August 26, 2022
2 COVID-19 Pandemic Affects the Cancer Continuum, American Cancer Society, February 11, 2022
3 Telehealth groups cheer omnibus extension of COVID-19 flexibilities, HealthCareDive, December 21, 2022
4 Healthcare M&A activity hit record high in 2022, Levin Associates, January 3, 2023
5 Omnibus spending package makes FDA diversity plans, confirmatory trials mandatory, wcg CenterWatch, January 2, 2023
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Dr. Dhar is Vice Chair and US Life Sciences and Health Care (LSHC) Industry Leader for Deloitte LLP leading the overall strategic direction for the life sciences and health care practices, including audit, consulting, tax, and advisory services. He is a respected health futurist and sought-after digital disrupter. Asif helps Governments, Life Sciences and Health Care clients reinvent wellness, solve disease, address pandemics and tackle health inequities. He is also Deloitte’s Lead Partner for the Firm’s US Food and Drug Administration (FDA) relationship and responsible for all work Deloitte performs with and for the Agency. His perspectives on real world evidence, regulatory sciences, digital health, and innovation are sought by clients around the world. Asif’s passion for the LSHC industry is evident in all that he does – as a pioneering thought leader who helped establish a framework for the Future of Health, formed ConvergeHEALTH, an award winning life sciences and health care software solution, and helped frame numerous COVID-19 health-oriented reboot and recovery solutions. He advises some of the world’s most innovative companies and Governmental agencies tackling disease and public health.