A recent New England Journal of Medicine article commented that the U.S. health care market’s future was “muddier” now than at any time in the past few decades. Fitch Ratings and Moody’s have already provided a negative hospital sector outlook given providers' ongoing focus on operational, clinical and transformational initiatives, depressed commercial rate increases, and less financial support from the government. As a result, we expect continued-belt tightening in 2019, stronger players to continue growing their footprints, and weaker ones to come in out of the cold. But just when the November election results indicated: “Repeal and Replace” might be finally dead, along comes the Texas vs. HHS decision and rules the entire ACA unconstitutional. While the decision will be appealed, its impact on the market will be unsettling, and may force the newly divided Congress to take action to preserve popular ACA provisions such as protections for preexisting conditions, Medicaid expansion, and others. But despite the market uncertainty, there are a few trends that have recently come into focus which may have more importance in 2019 than expected. These are:

Trend #1: Payer Growth Strategies Will Increasingly Impact the Provider Market for Physician and Non-Acute Care Services with Ongoing Disruption of the Ambulatory Market

Payers are struggling just as hard as providers to maintain margins, but they haven’t got as much attention. When the Affordable Care Act’s passage established an annual minimum of 80% for small group insurance plans, and 85% for large group insurance plans, it took a lot of profit out of the market. Insurers with MLRs below the ACA minimums lost over a billion in margins they had repay to consumers, causing them to scramble to add quality improvement expenses to the incurred claims amount of the numerator of their medical loss ratio calculations. This also led to new payer growth strategies, which has included acquisition of physician groups and direct-to-consumer strategies to influence their utilization non-acute services. For example, payers like United are adding new Per Occurrence Deductibles (POD) of around $500 when patients have services in a hospital setting rather than a less costly community-based setting, thereby encouraging consumers to shop, and hospitals to become more price transparent and focus on quality.

With the closing of the $4.9 billion DaVita Medical Groups deal, United’s Optum division will employ over 40,000 physicians, almost twice as many as Kaiser. The $69 billion Aetna/CVS deal, and the Cigna $67 billion Express Scripts acquisition will take additional bites from the non-acute ambulatory care market. Theoretically at least, as insurers expand their share of the physician market payers will be in a better position to determine where specialty services are delivered, and what hospitals are utilized as value-based contracting partners. These incursions will in turn motivate providers to focus on developing their own “magnet physician enterprise” strategies, by adding scale to their physician foot print, and maintaining a “must be included” position in payer contract networks.

Trend # 2: “Curating” an Effective Value-based Contracting Organization Will Become an Ongoing Provider Priority.

The healthcare market appears to have passed the point of no return on value-based contracting. If it wasn’t clear that value-based contracting could work before, recent analysis from several sources indicates that ACO/CINs in the MSSP and commercial gain-sharing contracts have a three to five year learning curve, after which many do become profitable. Since commercial plans are positioning themselves to further commercial insurance payments, providers will need to move over a period of time to greater risk sharing. “Curating” their clinical network around cost effective physicians will be necessary to achieve a “must be included” position in value-based commercial contracts.

Trend # 3. Large Employers Will Disrupt the Healthcare Delivery and Financing System By Directly Supporting New Models of Care.

Large employers are increasingly frustrated by the failure of traditional cost-sharing mechanisms and will increasingly take a more activist stance in 2019, in seeking ways to rein in costs and improve their employees’ health. A recent survey by the National Business Group on Health indicated that about half of large employers plan to drive changes by contracting directly with providers, or through their health plans, leveraging digital solutions, or both. The focus on virtual telehealth services will be the top healthcare initiative for most corporations, but was barely on their radar a few years ago.

Trend # 4: Provider Venture Capital Investing Will Drive an Expansion of Innovation in the Acute and Non-Acute Care Markets.

In the past few years there has been a rapid expansion of hospital venture capital investing--- a new field of dreams for many providers. A few healthcare providers such as Ascension, the Mayo and Cleveland Clinics, Dignity Health, and Partners in Boston have had venture capital programs that have launched scores of new companies in the healthcare market. Now most large systems have venture capital arms and more small and mid-sized providers are scrambling to become part of the action. A recent BDC survey indicated that the number of providers with venture capital programs doubled between 2016 and 2018, with providers investing as funds or with teams managing off-balance sheet investments. Health system make good investment partners since they share similar objectives and rarely if ever invest alone.