What’s ahead for healthcare in 2023?

The new year may be a good time for a fresh start, but many in the healthcare industry are apprehensive about what 2023 will bring. From ongoing financial struggles to payer-provider contract difficulties and staffing shortages, the challenges may seem all too familiar to a beleaguered sector—with the added complication of a potential recession just over the horizon.

Still, it’s not all bad news: Experts predict continued, if less enthusiastic, investment into digital health companies. Federal agencies and accrediting organizations will also keep laying the groundwork for stronger health equity pushes.

Modern Healthcare spoke with industry stakeholders about their 2023 forecasts, and how leaders can best prepare for the next 12 months.

Financial hurdles

Health systems will likely face continued financial struggles, driven by ongoing staffing issues, lower patient volumes and inflation. The looming question is whether such factors will affect the healthcare industry’s ability to be recession-proof, as has been the case in previous economic downturns.

Unsustainable wage growth is not going away, even as systems try to control labor costs, said Tina Wheeler, U.S. healthcare leader at consulting firm Deloitte.

Patient numbers in many areas have yet to return to pre-pandemic levels. Expenses, including for supplies and pharmaceuticals, are expected to remain elevated. Health systems can no longer depend on federal COVID-19 relief funding to offset some of their costs, and Medicare reimbursement rate cuts threaten to pinch revenue.

“You’re going to have all these forces that are counterproductive that you’re going to have to navigate,” Wheeler said.

The continued shift toward outpatient care will strain hospitals’ profit margins, said Erik Swanson, senior vice president of data and analytics at consulting firm Kaufman Hall. He expects health systems to keep investing in areas such as ambulatory surgery, urgent care and retail pharmacy.

“The reality is … those sites of care in many cases tend to be lower-cost ways of delivering care, so ultimately it could be beneficial to health systems as a whole, but only for those systems that are able to offer those services and have that footprint,” he said.

Tom Hawk, a partner in King & Spalding’s healthcare practice, said non-operating results have been showing financial strain as well. Investment losses have dogged nonprofits and for-profits, with slowed refinancing activity for outstanding bonds and other debt.

Once interest rate hikes slow, healthcare executives are hoping to see the market stabilize, Hawk said.

Health system combinations

The number of hospital transactions has steadily declined over the last four years. But merger activity is poised to rebound as health systems look to spread rising labor and supply costs over larger organizations, improve their standing in the bond market and boost their bargaining leverage with commercial insurers to mitigate Medicare reimbursement decreases, market watchers said.

Smaller organizations may seek to maximize their resources by teaming up with larger systems with greater access to capital.

“There is going to be some organizational soul-searching for some health systems that might force them to affiliate, even though they prefer not to,” said Patrick Cross, a partner at law firm Faegre Drinker Biddle & Reath. “Health systems are soliciting partners, not because they are on the verge of bankruptcy, but because they are looking at their crystal ball and not seeing an easy road ahead.”

Financial pressures will push physician practices to join health systems, private equity-backed groups, larger practices and insurance companies, said Joshua Kaye, chair of the U.S. healthcare practice at the law firm DLA Piper.

“Many independent physicians are really struggling with their ability to maintain their independence,” Kaye said, noting that their practices’ valuations have dropped as it has become more expensive to borrow money. “There will be a fair amount of deal activity. The question will be more about the size and specialty of the practices that will be part of the next consolidation wave.”

Focus on recruitment, retention

Job openings across healthcare reached an all-time peak in September 2022 at 9.2%, according to data from Fitch Ratings. That was more than double the 4.2% average job opening rate from 2010 to 2019. Although payrolls at nonprofit hospitals and ambulatory healthcare services increased slightly toward the end of 2022, the number of employees quitting remained high.

With such trends likely to continue, finding effective ways to recruit and retain clinicians will be crucial, said Dr. Iman Abuzeid, co-founder and CEO of Incredible Health, a nurse hiring platform.

Some organizations are upgrading their processes and technology to hire more rapidly, she said. They are establishing service-level agreements between recruiting and hiring teams, such as ensuring an interview is scheduled within 48 hours or a decision is made within 24 hours.

Eric Burch, executive principal of operations and workforce services at healthcare performance improvement company Vizient, predicted an ongoing need for contract labor. In response, health systems should continue to build travel nurses into their staffing plan, he said.

“It’s really important to approach contract labor vendors as a strategic partner,” Burch said. “So when you need the staff, it’s a partnership and they’re able to help you get to your goals, versus suddenly reaching out to them and they don’t know your needs when you’re in crisis.”

Health systems will need to ensure physicians are compensated adequately for the care they deliver, while also hiring additional staff to augment the workforce and alleviate burnout, said Dr. Tochi Iroku-Malize, president of the American Academy of Family Physicians. The group supports legislation and policies that would streamline prior authorization processes in the Medicare Advantage program and avert further cuts to Medicare payments so physicians can focus on providing care with less stress.

Hospitals should also consider partnering with local medical schools to educate students on work opportunities, said April Taylor, vice president of quality at Johns Hopkins Hospital and National Association for Healthcare Quality board member.

“Every time you think you’ve gotten to that place of sustainability, something new happens,” Taylor said. “So the ability to be nimble ... [has] been highlighted even more throughout this process. But fast-forward six months from now: Once we get through this, I think healthcare organizations will be even more prepared for what’s to come in the future.”

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Payer-provider contract spats

A possible recession—and the job cuts that typically accompany one—would limit health insurance companies’ prospects for commercial enrollment.

Recessions tend to shrink insurers’ commercial business, which is their most profitable line of product, said Brad Ellis, senior director at Fitch Ratings.

Individuals who lose their jobs likely will sign up for Medicaid plans, which is the least profitable arm for insurers, he said.

Members’ moves to Medicaid would come as insurers prepare for redeterminations. States paused eligibility checks for the program during the public health emergency. A deal reached by congressional lawmakers in December last year would mean states will begin reviewing individuals’ qualifications in April.

An estimated 18 million people will no longer be eligible for the public health program, according to the Robert Wood Johnson Foundation.

Insurance companies will look to offset any losses by continuing to expand into the Medicare Advantage program, in the hopes the nation’s aging population will make demand for the product recession-proof, Ellis said.

Given increased labor, supply and infrastructure costs, providers could pressure insurance companies to increase the amount they pay for services, he said—with insurers that agree to higher reimbursement passing increased costs on to their member premiums.

Insurance companies will be watching how legislators finalize rules for the No Surprises Act’s independent dispute resolution process, he said. Payers expect regulators to begin issuing fines to enforce the price transparency requirement, with companies facing fines of up to $100 per affected individual per day if they fail to publicly post the rates paid to providers.

Strong, if subdued, digital health market

Investment into digital health companies in 2022 didn’t hit the highs of 2021, with experts saying the fundraising market is unlikely to look much better this year.

“You’ll continue to see layoffs, and startup funding is going to be hard to come by,” said Russell Glass, CEO of the digital mental health platform Headspace Health.

But that doesn’t mean interest has completely waned. Investors and healthcare leaders are still expecting a strong market for digital health technology, particularly tools enabling revenue cycle management and hospital-at-home programs.

Scott Barclay, a managing director at venture firm Insight Partners, said his company is funding fewer deals.

However, he said, “the checks we write in the next three years will power an entire next generation of clinical outcomes and human health impact, as well as return for our investors.”

At venture firm Third Culture Capital, founder and managing partner Dr. Julian Pham said he expects continued investment from corporations such as CVS Health into health tech companies, as well more digital health merger and acquisition activity overall.

He also predicted increased curiosity from investors, pharmaceutical and health insurance companies about digital therapeutics, which are clinician-prescribed software applications.

“As a physician, I’ve always dreamed of a future where I could prescribe an app,” Pham said. “Is it the right time? Time will tell. A lot needs to happen in digital therapeutics and it’s going to be hard.”

On the insurance company side, Blue Shield of California President and CEO Paul Markovich said many of the digital health investments his organization has made in the last few years will produce tangible results in 2023.

“More and more people are going to be able to pick up their phone and do a one-touch pay for their claim,” Markovich said. “As these technologies start to become more real, it just opens up a lot of possibilities for the people who would benefit from this value.”

Moves toward health equity

The Health and Human Services Department in 2023 is set to restore an Obama-era rule under the Affordable Care Act prohibiting discrimination based on gender identity or sexual orientation. The department issued a draft regulation in July 2022, citing a 2020 Supreme Court case that ruled employers cannot fire workers for being gay or transgender.

Experts forecast clashes with states that recently passed laws seeking to ban gender-affirming care for minors.

“It’s something that’s going to bear out in the courts and will likely lack clarity. We’ll see differences in what different courts decide,” said Lindsey Dawson, associate director of HIV policy and director of LGBTQ health policy at the Kaiser Family Foundation. “The Supreme Court acknowledged that there was this tension. So it’s an important place to watch and understand better moving forward.”

The Centers for Medicare and Medicaid Services will continue rolling out a slate of health equity initiatives and quality measurements for providers and insurers serving marketplace, Medicare and Medicaid beneficiaries. The federal government announced in 2022 it would start measuring hospitals’ health equity performance this year. CMS is also adding new quality measures regarding maternal health, opioid-related adverse events and screening for social needs and risk factors. The agency will distribute “birthing-friendly” designations to hospitals ranking highly on the Hospital Inpatient Quality Reporting Program’s maternal morbidity structural measure.

Accrediting bodies, such as the Joint Commission and National Committee for Quality Assurance, are joining the agency in establishing standards for health equity and data collection.

Medicaid plans are broadening benefits in 2023 to address social determinants of health and increase care coordination for high-risk patients. Democratic governors in states like North Carolina and Kansas have vowed to push for program expansion in Republican-controlled legislatures.