By Caroline Xie, Candace Widdoes, Sruthi Ramaswami, Elizabeth Mossessian, and Story Viebranz | November 17, 2021

How COVID-19 is Transforming the Healthcare Industry

COVID-19 is upending the entire realm of health care with its true impacts only beginning to be felt. “The post-pandemic period will be a sustained time of stress and kaleidoscopic shifts for all players across the health care ecosystem—especially payors, providers, and the capital allocators playing an increasingly deterministic role in our space,” says Eric Larsen, president of the Advisory Board Company, a best practices firm dedicated to improving the performance of health care organizations around the world.

On October 29, ICONIQ Growth had the pleasure of hosting an ICONIQ Ideas online conversation with Eric Larsen and Dr. Toby Cosgrove, former president and CEO of Cleveland Clinic and leader of ICONIQ Growth’s Healthcare Advisory Council. Below are some key takeaways from their conversation:

  • Consolidation among health systems will continue to accelerate post-pandemic. As of 2019, the top 100 systems controlled $856B in revenue out of the $1.3T sector. The concentration was even more significant in the top 10 systems, with $324B in revenue. Post-pandemic, the FTC will likely discourage intra-market (within the same geography) consolidation but does not have much precedent to dispute inter-market (across geographies) consolidation. However, this horizontal consolidation is unlikely to lead to superior operational or financial outcomes. Even with record intervention and fiscal stimulus towards hospitals and health systems in 2020, the average operating profit margins of these institutions is still thin (average 1.6% operating margin pre-pandemic, now decreased to 0.03% without stimulus).
  • Vertical integration (both integrating payor functions and integrating ambulatory assets) for health systems will stall. From 2015 to 2017, there were ~43 attempted vertical mergers, either a hospital acquiring a payor or launching a de novo payor, or a payor acquiring the hospital system; only four of these plans were profitable by late 2017. In terms of ambulatory integration, hospitals which are increasingly economically constrained will likely not be able to compete with asymmetric aggregators of physician practices, such as payors/private equity/SPACs.
  • Physician-centricity will define the next decade. There is a current scarcity of PCPs which will be exacerbated over the next two years as a result of demographic and economic headwinds. Of the 229,000 PCPs nationally, 25% are 65 or older, suggesting a wave of impending retirements. We are also seeing significant investment interest towards risk-bearing primary care groups, which will likely destabilize traditional fee-for-service systems in a number of ways, including their ability to hire physicians. Therefore, physician groups are seeking to move quickly to PMPM reimbursement and a number of enablement players have emerged to support. These dynamics also present a significant opportunity to enhance clinical delivery models and augment the capacity of physicians with AI-based technologies. Can we increase traditional PCP panel sizes of ~1:2,000 by 10x?
  • Primary care will increasingly intersect with retail and commerce. The large retailers – Walmart, Walgreens, CVS, and others – are pursuing distinct strategies in healthcare around their ubiquity and proximity to most Americans. CVS is vertically integrating, starting with its acquisition of Aetna, with plans to open thousands of ‘Health Hubs’ in their retail locations, especially in dense Medicare-Advantage markets. Walgreens is taking a partnership strategy and working with companies such as VillageMD to build clinics. Walmart is concentrating its strategy in markets that are insufficiently served for primary care. These moves likely present partnership, not competitive, opportunities for hospitals and health systems to augment current primary care models.
  • Telehealth is revolutionizing care delivery, but its impact is nuanced. We should expect to see increasing commoditization and intensifying price competition among telehealth players who do not have defensible ‘moats.’ This creates opportunities to further verticalize in telehealth (What are the platforms you can build on top of telehealth infrastructure?) —and behavioral health may be the category that stands the most to gain. The pandemic has undeniably impacted our collective mental health and the structural scarcity of mental healthcare is even more pronounced than in primary care; 55% of American counties do not have a psychiatrist. Behavioral health is a category where consumers may actually prefer new delivery models (AI-based, synchronous and asynchronous communications) as improvements to traditional face-to-face meetings.

Consolidation of the healthcare system

Toby: You and I have spoken frequently about the influence of the pandemic, and how it elevated some trends, changed others, and started new ones. We have seen a tremendous consolidation of healthcare systems over the last several years. How do you think this is going to play out and what’s been the influence of COVID?


* In the US, we have a $1.4 trillion hospital and healthcare system. It is 6% of the GDP on its own. If it were its own nation state, it would be the 14th largest economy in the world, after Spain and before Australia.

* I think what is perhaps underappreciated is just the rampant consolidation that had already happened going into the pandemic. In 2019, out of that $1.4 trillion sector, the top 92 not-for-profit health systems, and the eight largest private equity-backed and publicly-traded hospital companies, collectively represented $856 billion in revenue out of that $1.4 trillion total. And the concentration is even more pronounced in the top 10 health systems that controlled $324 billion out of the total.

* This aggregation in size didn’t translate into much economic health. In fact, the average operating profit margin of those top 100 health systems in 2019 was 1.6%. Across 2020, we had $178 billion in fiscal stimulus for hospitals and health systems and another $100 billion dollars in loans. Even with that record intervention, the average operating profit margin still hovered around 2%. You take away that stimulus, and the Cares Act money, and the average operating profit margin now is .03%.

* With a much more muscular FTC and DOJ, and unambiguous support from the Biden administration for a more interventionist approach to consolidation across industries, there are a lot of folks who are going to look with great scrutiny on additional mergers. I would differentiate between intermarket mergers among hospitals and intramarket mergers. I don’t believe we’re going to see many more intramarket mergers.

* I think we will see the creation of multiple not-for-profit $20 to $30 billion health systems. And we’ll see more frenzied merger activity and more attempted horizontal integration in intermarket non-contiguous geographies.

Toby: What about vertical integration?


* I would separate out two kinds of vertical integration. The first is payor integration. Are we going to see hospital-centric health systems vertically integrate to require a payor or be acquired by a payor?

* I don’t think we’re going to see much more vertical integration between acute care centric hospital systems and payors. From 2015 to 2017, there were on the order of 43 attempted vertical mergers, either hospital company acquiring a payor or launching a de novo payor, or a payor acquiring the hospital system. You fast forward to late 2017 and 39 of those 43 health plans were not profitable.

* If you look at the vertically integrated payor-providers now like Kaiser, Geisinger, or Intermountain— the average age of their health plan is 41 years old. It took more than a generation to figure out how to reconcile competing factional interests between hospitals, physicians, and payors, and figure out the complex science of risk-bearing capital and actuarial judgments.

* Over the last 19 months, a lot of those vertically integrated payor-providers did relatively well. They were economically healthy and collected premiums through their payor function. We did see the diminishment in patient volume, so the arbitrage was at least economically helpful, allowing them to tide themselves over. Meanwhile, the American Hospital Association estimated that hospitals lost $323 billion in revenue across calendar 2020.

* The other vertical integration is ambulatory integration. Are we going to see greater aggregation of physician practices? I think this is one of the most consequential shifts over the last 19 months. Seventy-one percent of our nation’s 950,000 physicians are now employees, and 50% are employed by hospitals. We’ve been seeing this corporatization of American medicine for a long time.

Physicians as employees

Toby: What about the pressures that COVID brought on physicians? What’s been the effect of physicians becoming employed?


* It’s been a major accelerant. There’s not a lot of incremental room to become employed. The more consequential development over the last 19 months really has to do with primary care doctors not specialists.

* There are 229,000 primary care doctors in the country, and demographically 25% of them are over the age of 65. Heading into the pandemic, we were going to see a graying of the American physician. The Association of American Medical Colleges is projecting a potential scarcity of 130,000 physicians by 2033. And over the last 19 months, those 220,000 primary care doctors lost $15 billion in combined revenue.

* In March, April, and May of 2020, when the volumes vaporized, it caused a liquidity crisis for a lot of these subscale and undercapitalized primary care businesses. That liquidity crisis led pretty swiftly to a solvency crisis.

* Of all the sorts of players in the ecosystem who were most disadvantaged, I believe it was fee-for-service exposed hospitals and health systems. They were not in an advantaged position to acquire more physicians. So now we’re seeing the real corporatization I think that will continue.

Private equity in healthcare

Toby: Private equity has moved into healthcare in a major way and they’ve been very successful. How is this going to affect the status quo in healthcare delivery?


* Private equity has long been aggregating physicians, but they tended to do a lot of procedure-based office space physicians in dermatology, ophthalmology, veterinary, etc. Now, we’ve seen a deceleration of that and an acceleration in terms of private equity and venture capital growth equity going toward risk bearing primary care.

* The capital allocators have been getting behind the right horse. And I think this is hugely consequential for the industry. It’s been a little bit of a feeding frenzy. I think this is going to be a transformational force in health care for total cost-of-care management, patient centricity, etc.

Toby: The biggest payors are the government and Medicare Advantage. Do you see any major changes in policy over the next several years in those arenas?


* I do think that there has appropriately been a temporary de-emphasis on total cost of care, and the unsustainability of the cross-subsidy economics between employers and government, etc.

* This is an interesting moment, where we’re all collectively pausing and asking how successful have we been about migrating this 17.9% of the GDP toward being more value-based—let alone a capitated arrangement. The data is pretty sobering.

* In 2015, the average hospital had 1.3% full capitation. In 2019, when the data was most recently tallied, that number has increased to 1.6%. The academic literature suggests a health system needs 23% to 29% full capitation to make the economics go around to practice true population health, to take ambulatory sensitive admissions and divert them, etc.

Healthcare goes retail, and vice versa

Toby: Healthcare has attracted a lot of the big retail players, like Amazon and Walmart. For example, Amazon purchased PillPack and is expanding into telehealth. How do you think that will play out and who would you be concerned about if you were a CEO of a hospital?


* The retailers are not monolithic in their strategy. Walmart is different from CVS; Aetna is different from Walgreens.

* The CVS strategy has been to go all-in and vertically integrate, acquiring Aetna and converting a good percentage of their nine or 10,000 retail sites into health hubs. Now they’re dedicating full sites to primary care, chronic kidney care, behavioral health, etc.

* Walgreens is doing more of a partnership strategy and taking majority positions in companies. They are predicating on the ubiquity of their retail footprint as they have a retail site within 10 to 15 minutes of every American.

* Building out functional primary care and longitudinal care services for patients is very smart. If I’m a hospital or a health system, I do think there are probably more partnership opportunities than intrinsic competitiveness there.

* Given the widespread burnout, exhaustion, and even PTSD among physicians, I think an augmentation of the primary care platform is merited.

Big tech tackling healthcare

Toby: Microsoft recently had a couple of tries at bringing their technology into healthcare systems. Google had several tries and recently they disbanded Google Health. Haven Healthcare came along and attempted to bring together three major players—Amazon, Berkshire Hathaway, and JPMorgan Chase—with a new strategy and they haven’t done particularly well. I do think there’s enormous opportunity with the artificial intelligence and machine learning capacities of these big tech companies to help healthcare manage their data. But so far, it hasn’t gone very well. Why not?


* It isn’t that they haven’t been without impact, but it hasn’t come to maturity. These are some of the most dynamic and inventive companies in the history of capitalism, so I am not one to underestimate their eventual impact in our space.

* Again, these folks are not monolithic. Google’s strategy is not Microsoft’s strategy is not Apple’s strategy. But there are some commonalities. They all have that same metronomic, 90 day quarterly interrogation that every publicly traded company has to go through. Disrupting healthcare is a patient siege that requires a collaborative mentality.

* Typically, when you look at how big tech has prosecuted their healthcare agenda, it’s usually been as a division in the broader company. When you’ve got a profit engine—consumer devices like Apple, Google with digital ads, Microsoft and its innovations around B2B— that’s an existential level priority. Even if there are big aspirations at the CEO level, it’s hard to do healthcare extracurricularly. I am not optimistic that we’re going to see a real revolution by big tech in healthcare in the foreseeable quarters.

* In the next couple of years though, it’s going to be really interesting to see how Amazon advances its pharmacy strategy, how Apple evolves its wearables strategy, and the impact of AI and ML on these unimaginably large structured and unstructured data repositories that Google has, for example, and architecting some partnerships with payors to really accelerate diagnoses improve longitudinal care.

* Ultimately, I think big tech will have more of a partnership alignment in healthcare, rather than the disruptive revolutionary impact.

Transformation by telehealth

Toby: Telehealth went from about 1% of the visits at the Cleveland Clinic to 70% during COVID. And it’s now slipped back to 15% to 20% of visits. And many companies are entering that field. Who is going to be the dominant player here or will it be your community hospital?


* Telehealth and telemedicine is going to revolutionize healthcare and already has to a certain extent. But like so many of these disruptive innovations, it is massively overhyped in the short term but underappreciated in the long term.

* It is concerning to me that we are rubber-banding back to more conventional in-person visits.

* I do think you’re going to see a commodification trend of many of the undifferentiated telehealth platforms. The question is what you put on top of the platform. Virtualized primary care or verticalized solutions around diabetes, for example?

* Mental health is the singular area that has not come back down to earth from the virtual experience. 60% to 70% of visits are still virtual.

* Another major trend is the embracing of these new modalities of behavioral care. Over the last 19 months, our collective mental health has gotten materially worse. Meanwhile, the structural scarcity that we have in primary care is even worse, for psychiatrists, psychologists, and therapists. And it’s super exacerbated by a geographic maldistribution. In fact, 55% of American counties don’t have a single psychiatrist. There are only 31,000 psychiatrists in the United States. We need double or triple that number.

* People may violently disagree with me, but I think this is one of the few areas where the innovation in the modality to telehealth is preferred to the real thing. People don’t want to feel stigmatized or judged by another human. That’s why you’ve seen the embrace of these artificial intelligence-enabled cognitive behavioral therapy platforms and synchronous and asynchronous communication work in behavioral healthcare. We’re still awaiting peer-reviewed clinical data on this, but I think this is one area where the future is now.

Digital health’s watershed moment

Toby: We’ve seen a tremendous influx of money coming into supporting digital health startup companies, some $20 billion invested in the first six months of this year. Is this going to be as successful as fintech or other areas transformed by digital technologies?


* This is a Florentine Renaissance moment for digital health.

* With the liquidity in the market, the spigots are wide open. Where is all the hedge fund money going? It’s going into the private sector. They’re investing into growth and in venture and even seed rounds.

* Teladoc Health’s $18.8 billion acquisition of Livongo Health was a watershed moment. I think it catalyzed this unprecedented infusion of engineering, programming, and technology talent from Silicon Valley into healthcare.

* Previously, I think Silicon Valley always had an arm’s length appraisal of healthcare—that it’s too regulated, too impenetrable, too much incumbent domination. And now we have this liquidity and a couple very well-publicized exits. From 2016 to 2019, there was not a single digital health IPO. And now, 8,000 platform plays.

* I actually think a lot of these are products masquerading as companies. The capital is being pushed into these companies but are they ready? Meanwhile, at some point, there will be a market correction. What will happen to those digital-forward companies?

* What I’m really interested in is how we integrate their solutions into incumbents—hospitals, payors, physician offices, and employers. This is a revolutionary moment in the history of healthcare, an industry with a lot of incumbent strength. So how do we synthesize advancements?

Our frontline workers’ future

Toby: Healthcare is one of the largest workforces in the United States and, obviously, important to our health. What do you see as these workers’ future?


* There are 15.6 million Americans employed in healthcare in the United States. About 5.2 million of them are employed by hospitals and health systems. I want to acknowledge the heroism of these frontline caregivers. But it’s a failure of the system that they had to be heroic.

* Sadly, I think about COVID-19 as a starter pandemic. It will happen again. And right now, our workforce is burned out, exhausted, and angry.

* There are 3.8 million nurses in the country and 80% to 83% of them are actually practicing. But macro-economically, we’re seeing the great resignation, the great retirement.

* The best health systems, the best physician groups, and the best payors that are vertically integrated and employ these caregivers are being super compassionate. They’re getting very creative with staffing and also doing conventional things like retention bonuses, but there’s only so much you can do there. We are also seeing an absolute escalation in salaries and sign-on bonuses, and that’s unsustainable.

* We’re going to have to graduate more nurses and finally do what healthcare has never done, certainly not in the last generation, which is fix our productivity issue.

* With physicians, we must reconceptualize clinical delivery. The typical primary care panel is one to 1800 or one to 2200. With AI and machine learning, could we augment physician panels to one to 10,000? What about taking some of the really well-documented clinical delivery innovations in team-based care?

* Could we solve some of the insufficiency issues by using AI, ML, and a technological overlay to augment a primary care doctor at the center who is surrounded by a psychiatrist or a behavior analyst, pharmacist, a nutritionist, and a social worker?

* I have optimism, but it’s not a foregone conclusion that we’re going to fix all of this.

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