Venturing in Senior Care: Predictions for 2023

There’s something about the end of the year that makes investors want to give predictions for the following year. With a year’s worth of content ahead of us to consume, nobody will ever remember to check the predictions of yesteryear, so why not put something out there that folks will likely completely forget about starting in mid-January? It is with this understanding that I write my first public piece on healthcare, senior care, and venture capital.

All views expressed are my own.

Where are we going and who is steering?

• The senior living industry will continue down a collision course with the healthcare system. Most senior living operators are focused on providing hospitality services while staying solvent. Many are blind to the fact that 5.8 million Medicare beneficiaries live in senior housing and nursing homes, only 27% of assisted living residents receive annual wellness visits, and acuity levels are higher than they’ve ever been (residents of AL manage 14 chronic conditions on average — page 7). The industry is missing the bigger picture: senior living is a care setting where the medical and social determinants of health — such as socialization and activities, food and nutrition, transportation, built-in environment, and care delivery — are controlled. As cash-strapped operators push to diversify and grow revenue streams, and payors seek to have more control over beneficiary outcomes and experience, we’ll see more entrepreneurial and financing activity focused on linking senior living with the healthcare system. This will manifest itself in everything from purpose-built risk enablement tools (eg: August Health) to on-site healthcare services (eg: Curana, Pine Park Health, HarmonyCares, EmpowerMe Wellness, etc).
• New Medicare Advantage (MA) supplemental benefits companies will receive fewer VC dollars. In recent years, there has been an explosion of companies going to market as MA supplemental benefits providers. Others that started with consumer, or private pay-focused go-to-market strategies eventually pivoted to MA. MA has long sales cycles, and strong evidence bases are needed to get the attention of executives and actuaries alike. Furthermore, MA plans are notorious for their dislike of working with a myriad of supplemental benefits vendors. While the supplemental benefit opportunity is still very real, there is too much noise in the market for lots of new venture-backed entrants in 2023. I believe a better opportunity is to tech-enable existing potential supplemental benefits providers and connect them with MA plans versus building from scratch (eg: The Helper Bees). Do Terminix and the local handyman know that their services are covered by health plans?
• Specialty care’s convergence with value-based care will continue to accelerate. We’ve seen a lot of value-based care dollars aimed at primary care models, some primary care-specific and others “global”. It wasn’t until recently that we started seeing entrepreneurs building specialty care businesses aimed at capturing risk-based revenue streams, usually through the form of PMPMs or bundles. Companies that come to mind are Azra Care, Commons Clinic, and Remo Health.
• With a strong labor market, reimbursement rates that don’t keep up with the pace of inflation, and no targeted immigration reform in sight, healthcare staffing woes will continue. End of story.
• Some startups will pause their relentless pursuit of taking healthcare risk dollars. With an economic downturn already in full swing, Boards will refocus on revenue quality over quantity. Not all risk dollars are created equal. Top lines might be in the tens or hundreds of millions, but net margins often end up being in the low single digits. Boards will be more favorable to fee-for-service billing as a way to protect margins and build both the operational and clinical functions that will form the foundation of future risk-bearing capabilities.
• As VCs increasingly focus on developing high-level partnerships with health systems as a way to jumpstart customer and patient acquisition for their portfolio companies, so too will care delivery startups jumpstart their businesses by purchasing incumbent players. Also bidding on these incumbent assets, such as hospices and home health agencies, will be the big payors, who will continue to look for ways to contain healthcare spending under their ever-growing umbrellas and reduce MLR rebates.
• Vertical SaaS companies will continue to deliver tremendous value to their customers, typically payors and providers. However, quantifying and capturing that value will continue to be difficult. As such, many digital health SaaS companies will begin providing services as a way to capture more of the value they create for their customers. On the flip side, tech-enabled healthcare services companies with lower margins will look to expand margins by licensing the very technology they’ve built to power their businesses.

If you’re still reading, you’re really in for a treat. Look, healthcare expenditures in this country are out of control. Despite all the innovation in technology, care delivery, medical devices, and pharmaceuticals, healthcare costs have continued to rise throughout the decades. In 2000, the US national healthcare expenditure as a percent of GDP was 13.3%, in 2010, it was 17.2%, and in 2020, it was 19.7%. The sad part? There is no end in sight - at least in this decade - even with value-based care’s increasing prevalence.

Why?

Demographics and increased longevity (climbing enrollment in Medicare and Medicaid by people who will live longer than ever before)… and general cost growth, stemming from things like inflation, GDP growth, risk adjustment, and rising wages.

And this leads me to the most profound data I’ve come across all year (thanks to the Peter G. Peterson Foundation for its thoughtful ongoing coverage of America’s long-term fiscal challenges):

As the recent long-term projections from the Congressional Budget Office (CBO) show, the national debt is on an unsustainable path. Under current law, the nation’s debt trajectory will rise from nearly 100 percent of gross domestic product (GDP) at the end of 2021 to 185 percent in 2052. One of the largest drivers of that rising debt is federal spending on major healthcare programs, such as Medicare and Medicaid. Such spending is projected to rise by 68 percent over the next decade and will exceed all other categories of federal spending in 2030. By 2052, such spending will account for nearly 40 percent of the federal budget, exceeding the total amount spent on discretionary programs, such as defense and education, by nearly 50 percent.

Prediction for 2023–2052: something’s gotta give.

Happy new year.