Jul 20, 2022 - Health

Health industry's post-pandemic profit boom

Healthcare earnings, by sector
Reproduced from McKinsey; Chart: Axios Visuals

Health care profits will rise significantly over the next few years, according to a new McKinsey & Company estimate — further evidence that providers and payers are doing just fine in the wake of the pandemic.

Why it matters: Every dollar in profits is a dollar spent by someone else — whether that's individual patients, employers or taxpayers.

Between the lines: Higher profits don't necessarily mean higher overall spending (although they often do), and trends vary significantly within and between sectors.

By the numbers: McKinsey analysts predict that earnings before interest, taxes, depreciation and amortization will rise by 6% a year between 2021 and 2025, translating into an addition $31 billion in health industry profits.

  • Earnings grew by 5% between 2017 and 2019, but remained flat in 2020 and 2021 during the height of the pandemic.

Yes, but: Inflation is the wild card here.

  • The analysts cautioned that profits could decline by more than $70 billion during the 2021-2025 period "if inflation continues unchecked."

Details: Some major trends to watch...

  • Payer profits will increasingly come from government markets, as the Medicare-eligible population grows and Medicare Advantage becomes even more popular. Managed Medicaid plans are also expected to see further revenue growth.
  • The pandemic has sped up the transition away from expensive acute and post-acute care settings to cheaper freestanding and non-acute sites, which have higher profit margins. Although the shift may increase providers' overall margins, increased use of less-intensive facilities could simultaneously reduce the total cost of care.
  • An aging population will mean more chronic conditions and higher demand for care — a trend the pandemic likely exacerbated.
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