Medicare Advantage breakups and the role of commercial employer-sponsored plans

According to Hakanson, unsustainable payment rates and increased utilization management pressures have led providers to terminate contracts with MA plans.

This shift isn't exclusive to MA but is most pronounced in this area. Providers are more selective, cutting ties with underperforming plans while seeking stronger partnerships with better-performing ones.

"Providers don't think they're getting paid enough to deal with this increased cumbersome prior authorization and utilization management," Hakanson said. "So they are starting to shake up what the contract arrangements actually look like."

While the focus has generally been on MA, the commercial employer-sponsored landscape is also under pressure. Employers are grappling with rising healthcare costs and are exploring ways to break up contract dynamics.

However, Hakanson noted, "There are a lot of challenges to breaking up those contract dynamics in the employer-sponsored landscape," making it a more complex area to navigate.

Drug costs and specialty pharmacies

Trebes noted there is a dual challenge of rising drug costs for traditional medications and the introduction of ultra-high-cost treatments like personalized cell and gene therapies. These pressures are driving purchasers to demand cost reductions from all players in the pharmacy space, including pharmacies, pharmacy benefit managers (PBMs), and health plans.

"There's a lot of pressure and conversation around how are we going to rein in this spending?" Trebes said. "And that is the purchasers really asking everyone in the pharmacy space to work on that for them." This ongoing pressure is reshaping the competitive dynamics within the industry.

In addition, specialty pharmacies have emerged as crucial revenue for health systems. Burns noted that health system-owned specialty pharmacies are becoming essential to their operating margins, a shift that has been driven by the need to capture a share of the lucrative drug market.

"These are not the PBMs of yesteryear," Hakanson said. "They pass along those rebates to their employers. Now they make most of their revenue from fees on specialty pharmacy and fees on their [group purchasing organizations]." This evolution in PBM business models is a testament to their adaptability in the face of industry pressures.

The growing concern of cybersecurity and the role of AI

Trebes and Hakanson noted that cyberattacks have become more sophisticated, and as a result, have become a guaranteed cost of doing business in healthcare. Trebes specifically highlighted the interconnectedness of healthcare systems and the potential for widespread disruption due to cyberattacks.

Cyber resilience is crucial, Hakanson said. "It's not a matter of if you'll be hacked or one of your vendor partners will be hacked or disrupted. It's a matter of when."

This shift in focus from cybersecurity to cyber resilience is crucial for healthcare organizations to continue operating in the event of an attack.

Artificial intelligence (AI) is also playing an increasingly significant role in both cybersecurity and broader healthcare applications. Trebes noted that while AI offers great potential for improving care and operational efficiency, it also introduces new vulnerabilities. The explosion of technology and the desire to harness AI's potential are accelerating the industry's vulnerability to cyber threats.

"AI has offered us the potential to turn things that aren't structured into structured data that we can work with to create data that did not exist before," Trebes said. This double-edged sword of AI underscores the need for robust cybersecurity measures to protect sensitive healthcare data.

What health systems are focusing on strategically, and the impact of demographic shifts

Trebes noted that while 2024 was a year of healing and recapturing stability in the healthcare industry, the business model for health systems is not looking good for the future. She added that health systems have been seeing signs of financial fragility for a long time, with challenges in subsidizing costs, maintaining staffing levels, balancing inpatient and outpatient care, and managing payer partnerships.

As a result, Trebes said that health systems are now "doubling down on our focus on operational efficiency, on equipping the workforce, on prioritizing strategic initiatives, on thinking through what ambulatory assets we want to have."

Hakanson also noted that demographic shifts have had a significant impact on the healthcare delivery system, pointing out that the aging population, often referred to as the "Silver Tsunami," is not the only demographic change that health systems need to consider.

There are increasing rates of cancer, stroke, mental health issues, and substance use among younger patients under the age of 50, Hakanson said. This shift presents significant challenges for health systems, as they need to manage a worsening payer mix with more government-funded Medicare and Medicaid patients and fewer higher-margin commercial insurance patients.

"Not only are we going to be seeing more older patients, we're going to be seeing more sick younger patients," Hakanson said. "This is the thing that's happening under the surface that's not getting nearly enough attention."

Changing business models

Hakanson also noted that for younger patients, there is a significant growth in outpatient procedures, which are less complex and have higher margins. In contrast, the older population presents more complex, low-margin, longer-maintenance care covered by Medicare.

Trebes added that while hospitals are capable of providing excellent care, the financial proposition is difficult due to the longer length of stay and higher resource utilization for older patients.

As a result, many health systems are evolving their business models to accommodate these changes. According to Trebes, health system leaders are focusing on their ambulatory network strategy and prioritizing service lines that align with the demographic and case mix shifts. She emphasized the importance of navigating patients across multiple service lines in a cost-effective manner, as populations of patients increasingly have overlapping conditions.

"We see systems thinking about what are the set of ambulatory assets they have available to them and where do they want to make bets so that they can keep pace with this outpatient shift and with the case mix shift that they're going to see in the inpatient space," Trebes said.

Policy landscape and the political environment

According to Trebes, the new Trump administration and Congress bring both opportunities and challenges for healthcare organizations. She noted the importance of understanding the evolving ideologies within the political landscape and the potential for gridlock despite one party controlling the House, Senate, and presidency.

"This is a moment to potentially reset and reintroduce yourself to incoming state officials, incoming federal officials, and advocate for your system's perspective and your community's perspective," she said.

Hakanson added that state-level activism will play significant roles in shaping healthcare policy, noting that areas like prior authorization, AI oversight, and healthcare price control are likely to see significant action at the state level.

"A majority of the states in our country right now have a government trifecta where the governorship, the state Senate, and the state House is all controlled by one party, so they're going to be able to operate more efficiently, more easily," he said.