3 Areas That Will Impact Provider Profit Margins Post-COVID

Healthcare providers faced a rough couple of years as the COVID-19 pandemic dampened financial growth, but the post-pandemic future should create a favorable environment for provider profit margins, according to a new report.

The report authored by partners at McKinsey & Company estimates a 6 percent growth in healthcare industry Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITA) between 2021 and 2025. That would add about $31 billion in profits for healthcare providers and payers during that post-pandemic time period, the report states.

Providers could also face a $326 billion increase in profits in 2025, the report adds. Authors estimate a 7 percent compound annual growth rate (CAGR) for healthcare providers at that time as they face significant shifts in three care delivery trends.

First, healthcare providers should see patient volume increases in the post-pandemic period. The aging population—those 65 years or older—is expected to increase by 3 percent between 2021 and 2025, the report states. In contrast, the general population is only slated to grow by 0.5 percent.

Older adults require more services compared to younger populations, which tend to be healthier. Research shows that over half of Medicare beneficiaries have at least two chronic conditions and more than a third have four or more.

Speaking of chronic conditions, the report estimates that care delays during the pandemic will increase total cost of care. Exacerbation of chronic conditions, as well as natural disease progression, is slated to boost cost of care by about $7 billion by 2025.

However, shifts in payer mix and sites of care delivery could help to offset rising costs of care, the report indicates.

The second area impacting provider profit margins is where reimbursements will come from, the report finds. Providers are likely to receive more Medicare reimbursements as the aging population increases at such a rapid pace. Since Medicare pays below total of care, providers are expected to see a 0.5 percent decrease in absolute EBITDA dollars.

The overall reduction in reimbursement from more Medicare patients is likely to be balanced by a movement of people from Medicaid coverage to commercial insurance. The report estimated that the percentage of Americans on Medicaid will decrease from 25 percent in 2021 to about 22 percent in 2025 due to redetermination of eligibility.

Finally, a shift in acute sites of care is likely to impact provider profit margins and total cost of care. The report describes this factor as “a less obvious development,” but the report's authors argue that more care will be delivered outside of the hospital during the post-pandemic period.

“ The pandemic has driven the shift to non-acute settings, given the hospital backlog and patient and doctor preference for more convenient and virtual care. We have also seen underlying business shifts such as the accelerated adoption of value-based care,” they write.

Non-acute care sites have lower costs and EBITDA margins that are two to three times higher than the acute care setting. Additionally, value-based providers could realize margins of over 15 percent in primary care and specialty models as the payment structure incents lower costs and better patient outcomes, the report finds.

While provider profit margins could be on the up and up, the report did point out one serious caveat. Rising inflation could hamper healthcare industry profit growth in the post-pandemic period. The report estimates the impact of inflation could reduce profits by more than $70 billion during the period if the trend persists.