A frozen capital market and an insurance premium shock: 10 health care predictions for 2023 from top investors


Welcome again to predictions season. We’re happy to share what we see in our nonetheless murky, and materially extra dinged-up, crystal ball for 2023. However first, let’s look again and see how we did with our 2022 predictions.

In 2022, we scored 7 out of 10, approaching our earlier high-water mark of 8 out of 10 in 2021. We additionally wish to be aware that one in all our evergreen predictions–particularly, nothing would occur on drug costs–was an epic fail after the passage of the Inflation Discount Act. 

Moreover, we didn’t predict that we might all get up to Seventies-style inflation and a Fed mountain climbing cycle. This brought about a sudden finish to…effectively, nearly all the things: progress financings, IPOs, and frothy mergers and acquisitions (M&A). 

What we thought might have been a really profitable 2022 IPO class must wait till the markets enhance. We predicted M&A to double in quantity and worth. Whereas offers did exceed 2021 numbers by quantity, worth is lagging since many of those offers are being finished in misery. 

We anticipated the Facilities for Medicare & Medicaid Providers (CMS) to make strikes to switch threat adjustment in Medicare Benefit (MA)–however nothing occurred.  

Nevertheless, we had been appropriate a couple of bunch of predictions. COVID-19 deaths plummeted and lengthy COVID grew to become extra feared than acute an infection. On the authorized aspect, the Supreme Courtroom did overturn Roe v. Wade, and Elizabeth Holmes goes to jail. 

Karen Lynch, the CEO of CVS-Aetna, might need learn our prediction that payors could be racing to get into major care. On Aug. 2, Lynch mentioned, “(CVS) can’t be within the major care with out M&A,” and that “we’re very inspired and assured that we’ll take the subsequent step on this journey by the tip of this yr.” Lastly, the controversial Alzheimer’s drug Aduhelm launched with a whimper, and genetic sequencing firm Illumina is dealing with actual competitors (see prediction #9).  

Now on to 2023. Here’s what we expect goes to occur:

1. Non-public progress capital markets stay chilly

Whereas the personal capital markets will ultimately recuperate, phrases (worth, bells, and whistles) will likely be painful in comparison with prior years’ largesse. CEOs could have good purpose to have fun if they’ll obtain any progress spherical with clear phrases and at the least flat pricing. 

2. Fed will increase charges to five.5% or greater

We predict that the Fed goes to keep away from undershooting on rates of interest and go for what they assume will likely be a shorter recession now, versus the danger of protracted stagflation later. This makes us extra bearish than most bankers who are actually forecasting peaks of 5-5.25% after lately predicting decrease peak rates of interest.  

3. Business insurance coverage premium inflation shock

Whereas we consider that the Fed will succeed at controlling inflation for the general economic system, industrial medical insurance premiums will likely be an inflation outlier. Since well being care, as a market, tends to be much less attentive to the macro economic system, hospitals will succeed at elevating their charges by 5 to fifteen% yearly for industrial insurance coverage firms. Insurers will go this additional price alongside to employers within the type of premium will increase in extra of 10%. It will check the boundaries of what employers will settle for.

4. Particular person Protection Well being Reimbursement Preparations (ICHRAs) take off

In response to premium shocks, 2023 will lastly be the yr a significant variety of small teams drop protection and push individuals to exchanges. ICHRAs is a coverage enacted in 2020 that enables small employers to offer their employees pre-tax contributions that can be utilized to purchase insurance coverage as people. These people may additionally qualify for tax subsidies, which can make it a extra enticing possibility than high-deductible employer plans for lower-wage employees.  

5. Nothing adjustments on threat adjustment in Medicare Benefit

Regardless of our 2022 prediction that Medicare would make adjustments to threat adjustment, we are actually firmly within the “nothing goes to occur” camp. We expect a very good case may be made that threat adjustment is working effectively for getting sicker sufferers higher entry to well being care and incentivizing innovation and funding to profit them. Moreover, we expect {that a} Republican Home goes to quash any and all progressive issues about profiteering in Medicare. 

6. The brand new era of weight reduction medicine spawns the subsequent Cerebral

Cerebral is notorious for mainly prescribing ADHD medicine to anybody, with disastrous penalties. We consider {that a} related lack of oversight, in addition to a conflicting set of incentives and weak moral boundaries, will create an analogous dynamic amongst the direct-to-consumer weight reduction firms as extra individuals turn into conscious of the brand new efficient weight reduction medicine.  

7. Well being tech M&As set an (notorious) file for many offers

For 2022, we predicted a doubling in deal depend and worth for well being tech M&A. In 2023, we’re solely predicting extra offers than in 2022, despite the fact that 2022 was a file yr when it comes to the full variety of M&A offers accomplished. 2023 will break that file–however many of those offers will proceed to be distressed as cash-burning firms fail to boost extra fairness. Acquirers, each massive public firms and personal firms which have robust progress and margins, will look again in a number of years and see loads of worth created by their 2022-2023 acquisitions.

8. Congress ratifies telemedicine–and gridlock ensues

The one well being coverage that Congress might enact in 2023 will allow telemedicine in authorities packages. We consider that the proof is overwhelming that telemedicine is clinically helpful, appreciated by sufferers, and permits modern medical fashions. We can’t think about taking digital care away from seniors–and we additionally assume digital care will likely be important for bettering entry to specialty care in much less city areas and excessive labor price markets. After which nothing else will get finished.

9. No holy Grail for Illumina  

Given regulatory pushback, by the tip of 2023, Illumina could have disposed of Grail. Extra importantly, the acquisition and divestment could have been a monetary catastrophe. Illumina will lose greater than all that they paid for it (when accounting for residual worth much less buy worth, authorized prices, capitalization of the spin-off, burn charge, and many others.). In different phrases, even when they bought Grail at no cost, they’d nonetheless have misplaced cash.

10. Transgender remedy turns into the brand new abortion 

With Dodd’s resolution offering a roadmap for delegating energy to the states to control abortion providers, we expect conservative states will take an analogous method to ban transgender reassignment procedures. At the moment, 4 states have handed restrictive legal guidelines. We predict that 10 or extra states will observe in 2023 and that opponents will tee up one other Supreme Courtroom showdown.

Even within the face of actual efforts by each Amazon and Apple, we’re doubling down on our 2022 evergreen prediction that “Huge Tech will proceed to be horrible at well being care.” We see no proof that Amazon Care, One Medical’s providers, or Apple’s {hardware} will change the outcomes or price curves considerably and are as bearish as ever in regards to the prospects of Google, Microsoft, Salesforce, and new entrant Oracle succeeding in well being care. 

Regional Blue Cross/Blue Defend plans ought to, however won’t ever, merge to raised compete. This prediction is new and evergreen as a result of it’s each utterly apparent in a “scale trumps all” business and practically inconceivable to materialize. Non-profit standing plus “management concerns”, big stability sheets, native boards, cartel-like Blues governance, and state regulators trying to extract concessions imply this technique will solely emerge after it’s too late.

We sit up for reporting again to you in a yr. In case you agree, disagree, or have ideas please attain out on Twitter at @bobkocher and @brobertsvc.  Within the meantime, we want you a secure and completely satisfied vacation season and 2023.

Bob Kocher and Bryan Roberts are companions on the enterprise capital agency Venrock, the place they put money into well being care companies.

The opinions expressed in Fortune.com commentary items are solely the views of their authors and don’t essentially replicate the opinions and beliefs of Fortune.

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