Happy 2025.

To all the healthcare workers doing overtime in the ERs over New Year's, we appreciate you.

For Hospitalogists today, this is an executive summary, mostly-skimmable format designed for the new year for you all to get caught up on what's happening in healthcare across sectors.

Healthcare doesn't sleep, and neither do I (half joking).

PS - thanks to everyone for all the well wishes related to the Hospitalogy Wrapped post. I really do appreciate each and every one of you!

Surprise at the bottom includes my thoughts on the college football playoff (Hook 'em) and my year in golf!

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Year In Review: Big Picture Themes that Shaped Healthcare in 2024

Policy

Plenty of unknowns with healthcare policy in a new regime. The Biden Admin generally worked to support and extend Obamacare, helping ACA enrollees pay for healthcare coverage through enhanced subsidies. Biden also passed the Inflation Reduction Act, which goes into effect this year and caps seniors' out of pocket Part D expenses at $2k, while the government negotiates prices on 10 pre-selected drugs (and the number of negotiated drugs increases over time)

Other things to watch out for on the policy docket include what the Trump Admin will do to those aforementioned ACA subsidies (expiring at the end of 2024) and how they'll mess with Medicaid or try to re-introduce competition / free market policies into the industry (HSA expansion, ICHRA, price transparency, site neutral payments, along with support for MA)

Lots of hubbub around PBM reform in the end of year spending bill that ultimately didn't culminate into anything. It would've required vertically integrated insurers to divest PBM / pharmacy operations. Relatedly, policymakers are rethinking how MLR is calculated as it relates to quality and bonus payouts, so that is something very material to watch.

Capital Markets

PE - private equity activity likely dropped by 10-15% in 2024 given heightened FTC and state scrutiny. Portco's are being held for longer and recaps are more difficult given the valuation difference between companies formed in the ZIRP era vs. higher interest rate environment. This dynamic will continue to challenge investment outcomes moving forward unless there's strategic interest like we've seen with drug distributors and community oncologists. Of course, the med spas continue to reign supreme.

VC - Funding has leveled off seemingly at 2023 levels, with average deal size at $21.7M during the first 3 quarters of 2024 per Rock Health.

M&A - After a year of FTC challenges and meddling, everything I've read and seen noted a muted M&A environment for the first 3 or so quarters of the year, with a pickup in Q4 and an expected return of activity in 2025.

Payors

MA woes and MA penetration

The Medicare Advantage market continues to grow, but saw a bunch of headwinds in 2024 from several directions. It was such a perfect storm of events that giants like Humana and CVS were brought to their knees, and the trickle-down effect these dynamics had on value-based care enablers in MA was equally problematic for players including agilon and Evolent. I have covered these quite a few times in Hospitalogy throughout 2024, but specifically, Medicare Advantage headwinds during the year included a rise in senior utilization (more outpatient surgeries, more drugs), poor base rate increases, changes to risk adjustment calculations, poor Star ratings, and more. You should know that not everyone in MA is struggling, and there's likely a rebound to be had in 2025.

ACA

Notable growth vehicles within the ACA include ICHRA, a promising option for employers. Enhanced subsidies enabled most of the enrollment growth in recent years, which have acted as a stabilizing force within ACA risk pools, as healthier individuals enter this segment.

Commercial

As ACA and MA plans continue to grow, employer sponsored health insurance is stable to slightly declining. As you can imagine and given the current economics of provider organizations, there is more pressure than ever for employers to subsidize these other government sectors to drive financial performance, and between specialty drugs and general healthcare cost inflation, healthcare costs continue to rise at an unsustainable rate, outstripping overall GDP growth. The question remains - and continues, seemingly evergreen to remain - when is the breaking point? Plus, what do we make of these ERISA lawsuits? When will employers feel compelled or obligated to pursue more drastic action, if at all?

Medicaid

I keep hearing from folks, "watch the Medicaid space" so I'll keep watching it in 2025. Several companies were given large funding checks to enter Medicaid in various categories. I'm less familiar with the happenings here but know there are pockets of opportunity across states and the separate priorities they have within their respective programs. Plus, there's sure to be plenty of change to Medicaid given the new administration. I'll keep this purposefully vague for now.

Vertical Integration

If anything, 2024 was the year of vertical DIS-integration after heightened FTC involvement and little to no market activity from usually acquisitive players like UnitedHealth Group. UHG in particular has its latest deal with Amedisys tied up in court and is dealing with major PR-driven backlash from its perceived denial rate and general health insurance malpractices. CVS at one point, despite making several acquisitions in favor of a vertically integrated flywheel, considered breaking itself up in the back half of 2024 as a strategic option. Still, Elevance formed Mosaic Health alongside CD&R this year, intended to create a national care delivery platform.

Hospitals & Health Systems

Utilization returns - most large health systems saw a major boost to volumes in 2024, the most obvious of these names being HCA. Through a mixture of more admissions, higher acuity patients, better negotiated rates, and local market density, HCA and other systems with similar characteristics experienced significant growth and margin recovery. Add to this dynamic a drastically improved contract labor environment and a favorable payor mix as patients shifted from Medicaid to higher reimbursing ACA plans, and the health system outlook across the board is stable to good entering 2025.

Still, you need to know about the performance schism happening among health systems. Kaufman Hall - and Gist Healthcare - characterized this schism as a bifurcation of health system financial results between price 'makers' and price 'takers.' This dynamic simply means that the best performing hospitals are doing better, and the struggling hospitals are still struggling, or doing worse - and this margin spread is widening. The median hospital operating margin sits at around 2.4%, but this stat doesn't paint the full picture: "While hospital margins have demonstrated improvement over the last several years, growth has slowed in the last few months and may be settling on a new normal. A closer look at hospital performance at the individual level shows an increased divide between higher-performing hospitals and lower-performing hospitals." – Kaufman Hall's Erik Swanson, April 2024 National Hospital Flash Report

Meanwhile, health system transformation continues as 2025 was a year of hospital asset and portfolio realignment. Notable buyers and sellers include Ascension (exiting Chicago, JV with Henry Ford) and Tenet (divesting several hospitals and raising significant capital for its USPI strategy in the process). On the innovation side, we've seen several large-scale innovation joint ventures and partnerships form, whether culminating in new health system rollups like Risant or HATCo, or incubator thinktanks like Aegis & the Digital Consortium or Longitude Health.

Ambulatory Care

More physicians are employed or aligned with 'corporate' entities than ever before - bigger continues to be better in healthcare, especially as professional reimbursement slides and strategic economic incentives exist to acquire physicians into larger engines. The question is where things trickle from here. On one side you have folks saying we need to staunchly support the independent physician, a notion I - and quality data - tend to agree with. On the other hand, current physician practice economics support continued consolidation and employment / affiliation models. From Health Data Atlas:

The hospital 'subsidy' employment model for physician services is unsustainable as costs swell. From Kaufman Hall, investment/subsidy per physician topped $300,000 in Q3 for the first time ever. "The employment model where hospitals and health systems subsidize physician employment is broken and needs to change." What do ever expanding subsidies mean for hospitals? Requiring more productivity from their physicians, or shifting caseload to APPs - for instance, cRNAs for anesthesia. Which begs the question around whether these changes are what's best for the patient

Large, non-procedural based physician practice management companies are not doing well while subspecialties like orthopedics and cardiology (and stable to growing specialties like GI and Ophthalmology) are enjoying nice growth and demand for services as many procedures shift to the outpatient environment, also providing ownership opportunities for physicians in ASCs, physician practices, or VC-backed vehicles.

The ambulatory surgery center (ASC) continues to be an attractive investment for multiple reason (alignment between payors, provider orgs, and physicians).

Digital Health and Innovation

Public valuations have compressed, while private valuations have surged. This dynamic has sort of always been the case in healthcare, as quarterly public investors get antsy and discount a sector with a longstanding tradition of thinking long-term and slowly. But in general, public health tech companies struggled in 2024. Multiples have shrunk and performance has been dismal save for a few key names (Waystar, Oscar, Clover, Alignment, Hims & Hers). Several names delisted or went private / bankrupt - CareMax, NeueHealth (announced on 12/23 when we were all enjoying family time), Cano while several others are in serious decline - agilon, Accolade.

On the private side, with the surge in AI, William Blair noted the opposite valuation effect, which is two fold. First, investors are pouring money into later stage entities with profitable unit economics. On the front end, investors are backing their respective horses in AI. And we're seeing this effect play out in enterprise valuations. "Despite the previously discussed valuation compression in the public markets, private valuations appear to have had the opposite reaction. Health tech valuations have rebounded toward peak levels." Source (including below image): William Blair research; Healthcare Mosaic Report: Digital Health Update - No Longer Unicorns, but Phoenixes Rebound.

Expect the next batch of health tech IPOs to be a bit better off economically and somewhat more reasonable on a valuation basis. The question is how believable is the 'AI-enabled' narrative for the companies by investors, and do these AI features drive superior bottom line performance to their traditional healthcare counterparts. So far the answer has been a resounding "No."

Speaking of AI in Healthcare: nascent use cases include AI scribes, revenue cycle management, contact centers (call centers), radiology, benefits administration, and plenty more.

That's it for this send and a recap of high level themes and trends from 2024. What else should I touch on? Let me know by replying with your thoughts!

3. COMMUNITY UPDATE

The latest from inside my community of healthcare thinkers

If you're a VP or Director working at a health system or provider organization, you will get a lot of value out of my community as the content, fireside chats, and conversations all revolve around the latest developments in this specific area.

It's free to apply to (but support the movement by paying!). Apply to join here!

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MISCELLANEOUS MADDENINGS

Alright fam, here are some unfettered opinions from the game from hell (literally, I mean they are Sun Devils after all) and the CFP:

Skattebo is an absolute warrior and one of those college stories you absolutely can't root against. Dude is a menace and was their whole offense. I have to think if their one star WR was healthy that it would have been the difference for them
What a collapse by Texas in the second half. We are getting outscored something like 50-6 in the third quarter over the season.
Texas fans don't deserve Quinn Ewers and while he's far from perfect, dude is a baller. I think we see that next week because he loves playing the villain.
One bad targeting call, despite it getting called in 99% of instances, does not decide a game. What about the 4th and 13? What about outgaining Texas and failing on multiple fourth downs? The 300 pound lineman pulling (illegally) Skattebo into the end zone in overtime? In my experience there are a ton of 'what if's' in college football but the media and general fanbase loves to fixate on one or two plays
Is the SEC having a down year or is the beginning of the end of its reign atop college football?
Ohio State looks utterly unbeatable, and consensus seems to be they'll destroy us. It sure does feel that way given how Texas is coming off its performance, but I've come around to the idea that we can give the red-hot Buckeyes a run for their money
Sadly ticket prices are astronomical with the Dallas setting so it's a far cry that I'll be able to attend. I may take out a second mortgage for the natty, though.

Finally some of you might be interested in my golf rounds from the year. While they're way down from a year ago (for obvious reasons!) I like to think I've stayed in form alright!