Healthcare industry profits may have stalled during COVID-19, but the industry is trending back toward growth, according to a new McKinsey & Company report.

The report examines the healthcare industry’s ongoing recovery from COVID-19 and assesses its directional trajectory going forward.

“2021 is where things started to stabilize a bit. So we wanted to figure out what the new norm would look like post-COVID, knowing there will always continue to be waves,” explained McKinsey partner Neha Patel.

Healthcare industry earnings before interest, taxes, depreciation and amortization (EBITDA) rose by 5% between 2017 and 2019. Unsurprisingly, the pandemic years of 2020 and 2021 were flat. However, the researchers estimate that from 2021 to 2025, the industry may see growth up to 6% — which could contribute some $31 billion in profits.

This sum comes with a caveat, of course, and it has to do with inflation. If current inflation persists, those profits could decrease by $70 billion.

Anticipated industry shifts that could affect the bottom line include payer profit pools moving toward government segments, spurred by growth in Medicare Advantage and Medicare. Too, a larger shift toward virtual care, home-based services and non-acute sites may help boost EBITDA. Non-acute sites in particular have lower costs and higher EBITDA margins vis-a-vis hospitals.

It’s also possible that this shift could lead to a reduction in overall cost of care. McKinsey noted that reimbursement for surgeries at ambulatory surgery centers is 25% to 50% lower than it is at hospitals.

As a result, Patel anticipates several changes in business models. 

She expects hospital systems to diversify and expand care services across ambulatory sites, virtual care, primary care and post-acute care. Among the largest 50 hospital systems, a significant majority of net patient services revenue already comes from places other than in-patient care.

“Hospitals have kept many things within their own four walls, but now they’re thinking much more aggressively,” Patel explained. “How do they start to invest in digital? How do they continue to invest in primary care and post-acute care?”

Patel sees similar shifts in the pharmacy sector as pharmacies acquire physician and clinical assets to expand their primary care and value-based care businesses.

Then there’s the vertical integration spurred by expanding value-based care models. With Medicare Advantage, for example, payers hope to expand services to include virtual care, care management, medication adherence and pharmacy. McKinsey estimates that this could double or even triple the payers’ profit pool.

“Within the course of 18 months, we’ve seen private equity companies spin up full value-based care arms from scratch,” Patel said. “It’s been something that started with private equity, but it’s now starting to move over to the strategic side as well.”

Like many others, Patel is wary of an imminent recession. But Patel believes many of the report’s findings will hold regardless of the intensity of economic pressure.

For instance, she noted that more people have adopted technology as a method for care delivery — and they’re more comfortable receiving services within the home.

“Physicians and consumers have reset how they’re willing to deliver and consume care, and that’s despite any recessionary pressures occurring,” Patel explained. “Given that the care delivery landscape is headed in that direction, consumer consumption is opening up to receiving care outside of the hospital. We’re seeing payers start to move in that direction, too.”