How different sectors of the health care industry can overcome challenges in 2025

© onephoto - stock.adobe.com

For several years now, individual sectors within the U.S. health care industry have grown increasingly nuanced. Provider organizations and payers have been faced with a number of challenges over recent years, which are expected to carry over into 2025. Pharmacy services have been particularly unique, with some organizations reaping the benefits of pharmaceutical innovation and novel delivery models and some battling increased regulatory scrutiny. The health care services and technology (HST) sector has enjoyed the continued demand for data, analytics and software of the 2020s.

Ahead of 2025, McKinsey & Company (McKinsey) has published a new report, looking into the future of health care. The report outlines specific hardships and potential solutions for providers, payers, pharmacy services and HST as the sectors are faced with pressures from inflation, workforce shortages, regulatory changes and increasing patient demands. According to the report, the industry is well positioned to overcome these obstacles by adopting a patient-centered approach and making use of the latest digital technologies, including artificial intelligence (AI)-powered tools.

In a 2022 report, McKinsey indicated that the health care industry has the opportunity to generate more than $1 trillion through the implementation of interventions, including in care delivery transformation, administrative simplification, clinical productivity and technology enablement. Their latest report claims that they key to the health care industry’s economic recovery is to pursue that $1 trillion improvement opportunity.

Providers

In recent years, the COVID-19 pandemic, supply cost inflation and workforce shortages have challenged provider organizations. McKinsey analysis estimates the aggregate annual earnings before interest, taxes, depreciation and amortization (EBITDA) growth from 2019 to 2024 to be a roughly 2% increase, which is significantly lower than the 6% growth in national health expenditures (NHEs).

In response to this discrepancy, many providers have worked to boost their operating performance. Aided by the Coronavirus Aid, Relief and Economic Security (CARES) Act, and Medicaid expansion, provider performance has recovered to pre-COVID-19 levels in some states and McKinsey expects aggregate performance to recover by 2025. However, sustained financial stability requires ongoing productivity improvements and leveraging technologies, including generative AI, for efficiency gains in clinical operations, workforce, revenue cycles and patient access.

The implementation of AI technologies could result in significant cost savings—potentially reducing health care spending by $200 to $360 billion annually—and streamline administrative processes. Providers should carefully evaluate and invest in technologies relevant to their existing capabilities and future needs. In the report, it is estimated that currently available AI technologies could generate $24 to $48 billion for hospitals and $10 to $30 billion for physician groups in annual run rate net savings from administrative costs within the next five years.

There are also opportunities for growth in high-demand areas, including ambulatory surgery centers (ASCs) and home health, which are each expected to grow at 7% annually through 2028. These trends align with patient preferences for lower-acuity care settings and broader reimbursement options, potentially reducing health care spending by $114 to $148 billion, annually. Providers must adapt by aligning services with these industry trends, while maintaining hospital-based operations to balance financial performance. Competition from private equity and other entrants may pose additional challenges.

Payers

The payer sector of the health care industry faces mounting challenges in 2023 and 2024, including rising utilization rates, inflationary pressures passed from providers, regulatory changes and tighter government reimbursements. These factors have strained profitability, with some payers performing below breakeven, despite prior success. In response, payers should focus on margin recovery, cost management and growth opportunities in core areas, including Medicare Advantage (MA) and Managed Medicaid, while simultaneously innovating product offerings for employers that provide more attractive rates.

Key strategies involve leveraging technology to reduce administrative and medical costs—potentially saving $150 to $300 million in administrative costs and $380 to $970 in medical costs for every $10 billion in revenues, according to McKinsey. For MA, payers should address challenges like lower Star Ratings, rising costs and increased competition. In Managed Medicaid, despite declining enrollment, opportunities exist in transitioning fee-for-service members to managed care and Medicaid expansion in some states.

In the commercial market, premium advances are expected, but employers, especially small and medium-sized businesses, are seeking budget-friendly alternatives. Fully insured membership is declining, while the self-insured sector shows growth potential. Employers may shift to defined-contribution plans, such as individual coverage health reimbursement arrangements (ICHRAs), which allow tax-advantaged contributions toward individual coverage. ICHRAs are experiencing rapid growth, with adoption expected to rise by 29% from 2023 to 2024, offering payers a promising avenue for innovation and expansion.

Pharmacy services

The pharmacy sector faces a diverse set of challenges and opportunities for growth. Retail pharmacies are contending with margin pressures due to inflation, labor shortages, competition and real estate costs, while pharmacy benefit managers face calls for greater transparency. The increased demand for costly broad-population drugs, like GLP-1s, contributes added tension to the system due to slow payer coverage.

Growth areas include biosimilars and specialty drugs. Biosimilars, which saved $56 billion over the past decade, continue to gain broader market acceptance. Specialty pharmacies are projected to see significant growth, with an 8% compound annual growth rate (CAGR) forecasted through 2028, driven by therapeutic areas, including oncology, immunology and neurology. Cell and gene therapies are also expending, with broader indications potentially decreasing per-patient costs but increasing total spending, which could reach an estimated $28 billion by 2030—three times the 2021 level.

Innovative models, such as direct-to-consumer delivery and integrated medical-pharmacy care, are emerging but remain relatively small. Integrated care models show promise; for example, a pharmacy care management program reduced costs for medically complex MA members by $108 per member, per month, after 12 months.

The pharmacy value chain remains complex, with varying stakeholder incentives and pricing structures creating challenges with transparency. However, the push for more transparent and integrated business models is likely to shape the sector. Organizations investing in partnerships and innovative care delivery capabilities may drive efficiency and address pricing scrutiny in the years ahead.

Health care services and technology

In contrast to the other health care sectors, the HST sector has grown steadily to meet the rising demand for new data, analytics and software. Since 2019, the sector’s revenue and EBITDA have grown at a 9% CAGR, with similar rates expected to continue through 2028. Data, analytics and software subsegments are poised for double-digit growth as generative AI, and other advanced tools, continue to create new opportunities.

The HST sector remains highly fragmented, with the top 10 companies accounting for approximately 25% of revenue and the next 100 companies adding 15% to 18%, according to McKinsey’s research. This fragmentation is fueled by challenges that include limited interoperability between data systems, regulatory complexities and a diverse customer base, which spans providers, payers and pharmaceutical companies.

Leveraging advanced technologies like generative AI to enhance customer acquisition, improving technology integration and delivering actionable insights are key opportunities for value creation. Vendors must develop deep vertical expertise and prioritize seamless integration across data sources to address customer needs effectively. Ensuring robust cybersecurity measures and finding innovative applications for analytics tools will be critical for long-term success in this growing, yet fragmented, sector of health care.