Financial Performance of the US Healthcare Industry

This video provides an in-depth analysis of the financial performance and profit distribution within the US healthcare industry, drawing insights from a recent McKinsey & Company report titled "What to expect in US healthcare in 2025 and beyond." Dr. Eric Bricker, the presenter, uses key financial metrics like EBITDA (Earnings Before Interest, Taxation, Depreciation, and Amortization) and CAGR (Compound Annual Growth Rate) to illustrate how profitability has shifted across different healthcare sectors between 2019 and 2024. The core purpose is to highlight where the significant financial growth is occurring and the underlying reasons for these trends, particularly the impact of regulatory changes.

The analysis begins by segmenting the US healthcare system into four main areas: Providers (doctors, hospitals, physical therapists), Health Insurance, Healthcare Services and Technology, and Pharmacy Services. While overall national healthcare expenditures grew by 6.1% CAGR during the period, the profitability growth was highly uneven. Providers saw a modest 1.8% CAGR in profit, increasing from $273 billion to $299 billion. Surprisingly, the pure health insurance arm of major carriers experienced a negative CAGR of -1.2%, with profits decreasing from $55 billion to $52 billion. This counterintuitive decline for insurance companies sets the stage for the video's central revelation.

The most significant profit growth was observed in the Healthcare Services and Technology sector, which boasted an impressive 8.5% CAGR, with profits surging from $46 billion to $70 billion. Similarly, Pharmacy Services (including PBMs and specialty pharmacies) demonstrated robust growth with a 7.5% CAGR, also reaching $70 billion in profit from $49 billion. Dr. Bricker emphasizes that these high-growth sectors are predominantly comprised of wholly-owned subsidiaries of the very same large health insurance conglomerates whose direct insurance arms showed declining profitability. Examples include Optum (United Health Group), Change Healthcare (United Health Group), eviCore (Cigna), Optum Rx (United Health Group), Express Scripts (Cigna), and Kmark (CVS Aetna).

The video attributes this dramatic shift in profitability to the Affordable Care Act (ACA), specifically its Medical Loss Ratio (MLR) caps. The ACA mandated that insurance carriers spend a minimum percentage (e.g., 85%) of premium revenue on medical claims and quality improvement, effectively capping the administrative costs and profits they could retain directly from their insurance operations. In response, these large carriers strategically diversified and channeled their profit generation into their wholly-owned subsidiaries operating in healthcare services, technology, and pharmacy benefits, which are not subject to the same MLR caps. The conclusion drawn is that 40% of all healthcare profits in America are now captured by these "middlemen" subsidiaries, leaving 60% for organizations directly delivering care. This concentration of profit in the "middlemen" segment is presented as a significant entrepreneurial opportunity.

Key Takeaways:

• Uneven Profit Growth in US Healthcare: While overall national healthcare expenditures increased by 6.1% CAGR from 2019-2024, profit growth was highly disparate across sectors.
• Stagnation for Providers: Healthcare providers (doctors, hospitals, physical therapists) experienced a modest 1.8% CAGR in profit, indicating limited financial upside in direct care delivery.
• Negative Growth for Pure Insurance: The direct health insurance arms of major carriers saw a negative profit CAGR of -1.2%, a counterintuitive trend driven by regulatory constraints.
• Explosive Growth in Healthcare Services & Technology: This sector demonstrated the highest profit growth at an 8.5% CAGR, making it a primary driver of overall healthcare industry profitability. This area includes technology solutions and service providers that optimize healthcare operations.
• Strong Performance in Pharmacy Services: Pharmacy services, encompassing Pharmacy Benefit Managers (PBMs) and specialty pharmacies, also showed significant profit growth with a 7.5% CAGR.
• Strategic Profit Shifting: Large health insurance conglomerates are strategically shifting their profit generation away from their directly regulated insurance arms and into their wholly-owned subsidiaries in the healthcare services, technology, and pharmacy sectors.
• Impact of ACA's Medical Loss Ratio (MLR): The Affordable Care Act's MLR caps, which limit the percentage of premiums insurers can spend on administration and profit, are identified as the primary catalyst for this profit redistribution strategy.
• Dominance of "Middlemen" Profits: A substantial 40% of all profits in the US healthcare system are now captured by these "middlemen" entities – the service, technology, and pharmacy subsidiaries of large insurance carriers – rather than directly by care providers or the insurance arm itself.
• Entrepreneurial Opportunity: The significant share of profits held by these "middlemen" presents a substantial entrepreneurial opportunity for innovation and disruption within the healthcare ecosystem, suggesting that solutions addressing this segment could find considerable market traction.
• Integrated Healthcare Ecosystem: The video underscores the highly integrated nature of the modern healthcare industry, where insurance carriers are increasingly diversified into service, technology, and pharmacy delivery, making it crucial for other industry players to understand these complex relationships.

Tools/Resources Mentioned:

• McKinsey & Company Report: "What to expect in US healthcare in 2025 and beyond" (link provided in video description).

Key Concepts:

• EBITDA (Earnings Before Interest, Taxation, Depreciation, and Amortization): A measure of a company's financial performance, often used as a proxy for profitability.
• CAGR (Compound Annual Growth Rate): The average annual growth rate of an investment over a specified period longer than one year.
• Medical Loss Ratio (MLR): The percentage of premium revenue that health insurers spend on medical care and quality improvement, as opposed to administrative costs.
• Wholly-owned Subsidiaries: Companies completely owned by another company.
• PBMs (Pharmacy Benefit Managers): Third-party administrators of prescription drug programs for commercial health plans, self-insured employer plans, Medicare Part D plans, and other government-sponsored programs.
• GPO (Group Purchasing Organization): An entity that helps healthcare providers realize savings and efficiencies by aggregating purchasing volume and using that leverage to negotiate discounts with manufacturers, distributors, and other vendors.

Examples/Case Studies:

• United Health Group: Cited for its insurance arm (United Health Care) and its high-growth subsidiaries like Optum (healthcare services), Change Healthcare (healthcare services and technology), Nava Health (technology and services for discharge planning), Optum Rx (PBM), and MSR (GPO).
• Cigna: Mentioned for its insurance arm and subsidiaries such as eviCore (prior authorizations), Express Scripts (PBM), Accredo (specialty pharmacy), and Ascent Health Services (GPO).
• CVS Aetna: Referenced for its insurance arm and subsidiaries including CVS Specialty Pharmacy, Kmark (PBM), and Zinc (GPO).