December 2023Healthcare Practice2024 healthcare services outlook: Challenges and opportunitiesThe healthcare services sector has seen rapid growth over recent years. Despite the challenges organizations may face in 2024, opportunities for the sector still abound.by Neil RaoHealthcare services comprise a range of organizations, from technology companies and financial sponsors to pharmacies, that focus on the payer and health systems markets. Over the past decade, each of these segments has rapidly grown in number of stand-alone entities and total profit pools. We summarize our views on what 2024 holds for these key segments below. Healthcare services and technologyThree areas stand out in terms of opportunities and challenges:Data analytics and artificial intelligence (AI). Generative AI has aroused interest in health services and technology, but use case development and deployment are in their early days.1 Payers and health systems that have already invested in data analytics (as well as related infrastructure and governance) are beginning to differentiate themselves from competitors. We anticipate a greater focus on use cases that enable clear, near-term operational value—for example, AI that supports more rapid throughput of imaging equipment. Overcoming history, especially with health systems for which investment in technology has underwhelmed in terms of productivity gains, will be essential for health services to fulfill AI’s promise.Outsourcing. Strategic players, especially not-for-profit health systems and payers, are facing financial headwinds. While many are reticent to outsource given the impact on employees locally, the combination of the financial value proposition, rising gaps in capabilities, and the inability to otherwise access required talent is increasingly compelling. Outsourcing transactions often involve legacy processes that benefit from scale and automation (for example, transactional functions such as human resources and finance), but we are also seeing more point solutions and adoption in critical healthcare-specific business functions such as revenue cycle management. Programmatic M&A. Many healthcare services and technology companies have seen substantial reductions in their most recent valuations. Several have had to shut down or seek alternatives despite cutting R&D spending and loss-leading customer acquisition programs. Strategic and private equity (PE) investors now have an opportunity to add both talent and capabilities by acquiring these entities on favorable terms; advantageous refinancing for not-for-profit health systems through 2021 may enable not-for-profit health systems to diversify as opportunities arise.Private equity Global private equity deal volume in healthcare rose about 8 percent annually from 2017 to 2022. This period includes a material pull-back in 2022, when deal volume fell 37 percent year over year.2 Nevertheless, ...
