Key Points
- The transition to widespread adoption of value-based care (VBC) is accelerating, as physician and employer participation increases, and new tools are making it easier to reduce the cost of care.
- Technology is integral to the VBC transition, placing Healthcare IT (HCIT) at the intersection between providers, insurance companies and payers.
- Consolidation was a significant trend in 2022, and looking ahead, investors can expect M&A to continue.
- Interest rates and inflationary pressures have played a role in choppy valuations and pushed organizations towards increased outsourcing. However, the sector is driven by innovation and bolstered by the scale of the total addressable market.
Spending in the US healthcare system is widely perceived as unsustainable. On a per capita basis, the US spends more than most other developed nations. Yet, healthcare metrics suggest there is significant failure to generate a decent return. HCIT is at the center of the solution — with digital and technological tools expected to improve healthcare efficiency, effectiveness, and affordability. So, what does the near and long-term future look like for companies in the HCIT space? And how can investors navigate a busy and competitive landscape?
A value-based care revolution
The US healthcare system is on the cusp of a significant transition. Value-based care aims to deliver a model that incentivizes better healthcare outcomes at lower costs. The US spends approximately $4 trillion a year on healthcare, but less than 10% of payments are meaningfully tied to value. Targeting the inefficiency and redundancy in today’s healthcare systems, VBC adoption is rapidly accelerating. For companies in the VBC space, this is hugely encouraging and seen as a positive for the publicly traded VBC space.
“The three necessary elements are falling into place,” says Sean Dodge, Equity Research Analyst, Healthcare, RBC Capital Markets. “Physicians are willing to participate, it's easier to contract with payers, and new tools are making it easier to reduce the cost of care.”
However investors may be wary of some potential obstacles, as issues around upcoding remain.
“The risk scoring program does create some perverse incentives and has been set up where it can currently be abused,” says Dodge. “This has gone unpoliced for too long and the government will likely begin to reign that back in. Doing so will impact the margins of some players in the space.”
It is agreed that the widespread transition to VBC remains a challenge, including new workflows, new incentive structures, coaching, and new data flows. But it is clear from increased employer and doc participation, that we could be approaching something of a tipping point. Promising improved efficiency, VBC offers a solution to the systemic issues faced by US healthcare today — and long term.
The role of HCIT
HCIT is of keen interest to investors as a result of growing demands on the system. It plays a vital role in facilitating the transition to VBC, which requires a convergence of insurance companies, payers, delivery systems and healthcare providers.
“Some of these newer HCIT companies are a group referred to as the provider enablement — companies that have developed these turnkey platforms where they partner with existing doc practices and provide them with the software, systems, contracting, and workflow adjustments they need to make a seamless and successful transition,” explains Dodge. “To use a hockey analogy, HCIT is where the puck is going — and where you should be skating to.”
“When we think about what needs to be done to fix US healthcare it centers around first keeping people healthier, so they need less healthcare over the long run. And then when they do need care, making it more effective, more efficient, more affordable — while also improving the convenience and experience for the patient,” says Dodge.
“This is what all the companies in the HCIT space are focused on accomplishing in one way or another.”
Joining forces
M&A is a key sector trend, and investors can expect the high levels of consolidation seen in 2022 to continue. Many existing value-based solutions are merging, which is important for the future of the transition to VBC; a system requiring multiple smaller solutions. Bigger companies like Amazon are making deals in the space, meanwhile non-healthcare players are looking for sector entry points.
“Watch out for the power that many integrated delivery systems have amassed via consolidation,” says Dodge. “This could slow the transition, as their interests might not necessarily align with the mechanisms aimed at reducing healthcare costs.”
Pressures and headwinds
While digital health stocks did suffer another challenging year as a result of higher interest rates and inflationary pressures, the overall outlook for HCIT remains largely positive.
“It's a very exciting time for innovation. The exponential growth of investment we’ve seen in the space is helping drive a lot of that,” says Dodge.
Challenges for HCIT include rising supply costs, staff retention and wage pressures, higher interest rates weighing heavily on valuation. Investors may also find the increasingly noisy and competitive investment landscape a challenge to navigate going forward.
However, the sector has reacted to mitigate these pressures and is bolstered by a vast TAM. Outsourcing to third parties has become a rapidly growing trend, used to manage the challenges around costing and resources. There’s little sign that R&D funding has been notably weakened, and the potential for rate stability could help draw further interest back into the space.
“Even despite what was a very challenging environment for capital markets, 2022 is still two times bigger than what we saw in 2019. And the majority of this money is being used to drive innovation,” says Dodge.
