Welcome back to predictions season! We invite you to gaze into our cracked and cloudy crystal ball as we look ahead to 2024. But first, let’s look back and see how we did last year.
In 2023, we give ourselves seven out of 10, and while we aspire to achieve something better than a C, we think that’s pretty good. We also want to note that one of our evergreen predictions–namely, that “Regional Blue Cross/Blue Shield plans should, but will never, merge to better compete”–may be partially disproven if Blue Cross Blue Shield (BCBS) VT’s proposed merger with BCBS MI is approved by regulators. BCBS LA also attempted to merge with Elevance but that deal was blocked. We continue to think that payor scale is crucial, which should drive more Blues to combine, but despite making business sense, Blues mergers are almost impossible to pull off due to regulatory issues and departing management’s understanding that they have awesome jobs.
Our huge miss in 2023 was that the Centers for Medicare and Medicaid Services (CMS) did end up changing risk adjustment for Medicare Advantage (MA). To be clear, we love this and think it is a wise policy that improves the fairness and accuracy of risk adjustment–we were just really, really skeptical that it would happen. The revenue impact will ripple through MA plans and risk-bearing providers over several years as they tighten the belt in some areas and, undoubtedly, find other ways to replace their lost income.
Additionally, we were wrong about Individual Coverage Health Reimbursement Arrangements (ICHRA) taking off despite premium shock for many employers. Perhaps tight labor markets made employers risk-averse with regard to changing their benefits approach. We were also too early with our prediction for lots of fire-sale mergers and acquisitions (maybe only by months with M&A in progress for formerly high-flying startups Calibrate, WithMe, and Kinsa), and we still think that a reckoning is coming for many companies that have not made enough progress after raising money at the peak of the market in 2020-21.
Fortunately, we were right more often than not. We were correct about the economy. Notably, that IPO markets would remain largely off limits (and the trading performance of the couple of companies that have gone public recently is not helping) and interest rates would hit 5.5% (which was materially more bearish than consensus entering 2023). We were also correct that Illumina’s acquisition of Grail would be a capital-destructive disaster–it led to the CEO’s ouster and a 54% YTD stock price decline. Sadly, we were right that restricting access to transgender care would take center stage post-Dobbs and that, beyond extending telemedicine, gridlock would prevail in Congress. Lastly, we were correct that the efficacy of weight-loss GLP-1 drugs would lead to unethical prescribing.
Now on to 2024. Here is what we think is going to happen:
1. GLP-1s prove cost-effective and are prescribed as freely as statins
Wegovy’s cardiovascular outcomes data was stunning, and now there is the CKD trial success. The whole class will ride these cardiovascular disease benefits and future data will reveal benefits for liver disease, some cancers, and as prophylaxis for pre-diabetics. The effect could all be due to weight loss–no matter how you get there. We think the magnitude of their benefits, excellent safety profiles, and high level of demand for weight loss will lead GLP-1s (once cost-effectiveness is known) to become the next statins. In five to seven years, oral formulations will make this even more the case, but competition and direct-to-consumer advertising will take much of the economics out of the class for pharma.
2. Nothing happens to Pharmacy Benefit Managers (PBMs)
Despite pharma buying ads accusing PBMs of being middlemen that are restricting access to medication and driving up drug prices by adding fees (notably 53% of the price of Insulin are PBM fees), and endorsing nine bills aimed at curtailing PBM practices, we think nothing will pass and nothing will change. It is better politics, in an election year, to vilify PBMs rather than disrupt them. Any change to PBMs will be met with worries that patients will not get their medicines. Moreover, bills that go after PBMs may not lead to lower prices for patients. As Trump learned when he proposed the elimination of rebates for Part D drugs, it would only lead to higher premiums.
3. Supreme Court protects access to Mifepristone
While the Supreme Court made conservatives happy with the Dobb’s decision, we think that they will not go further by trying to pull Mifepristone from the market. We do not think that the court will take administrative authority to approve and regulate drugs away from the FDA.
4. Payors play hardball with hospitals and drop systems who refuse to negotiate
Normally, after much bluster, hospitals win payor negotiations since payors are unwilling to drop hospitals from their networks. This is because employers insist on broad networks which leads to payors acquiescing when push comes to shove. Eventually, terrible (>10% annually for multiple years) commercial premium trends will cause employers to reconsider what is a “must have” in a network and that this will give payors the spine needed to walk away from unacceptable rate increase requests.
5. CMS completes drug price negotiations on 10 drugs by the 9/1/24 deadline
Despite lawsuits, needing to hire a team to build a new capability, and threats of government shutdowns, we believe that CMS will hit the deadline and successfully negotiate lower prices on the first 10 drugs they tackle. As a positive start, drugmakers have agreed to negotiate. This will certainly be a political and policy accomplishment–and sticker prices will be lower. What is less clear to us is whether the prices will be lower than the current net of rebates–and we wouldn’t take that bet.
6. Medicare Advantage plans’ underperformance leads to leadership turnover
Poor acquisitions, failing to hit 4 stars, and sub-par risk adjustment will likely decimate several income statements. Centene and CVS/Aetna have struggled with Stars and this will cost these plans many millions–or even billion s. Risk adjustment changes in 2024-26 will also result in more revenue headwinds which could really impair growth, profitability, stock prices, and CEO job security, especially for the plans that miss out on the all-important 5% revenue bonus for achieving 4 Stars.
7. The Federal Trade Commission (FTC) sets its sights on healthcare monopolies
The mere mention of the word “Epic” normally elicits a groan from anyone who uses, connects with or exchanges data in healthcare. Congress has tried to create interoperability with 21st Century Cures but progress has been slow. Now, the promise of artificial intelligence (AI), a widespread desire by health systems to leverage their data, and the increased fees charged to get in and out of the EMR will trigger scrutiny.
Illumina, with flagging growth and potentially viable competition for the first time in NGS sequencing, will try to spur growth, perhaps by leveraging its market power. Competition regulators will take notice.
8. More unicorns lose their horns, deemed to be bad businesses rather than just having high valuations
The frothy private markets of 2020-2021 created 66 health tech unicorns–and many of these companies raised money at nonsensical multiples. Some will grow into their multiples since 50x revenue becomes a more plausible 10x revenue multiple after 4 years of 50% growth. What will separate success from disaster will be simultaneously making progress on gross margins and limiting cash burn so that profitability is in sight. Those who do will be able to achieve reasonable financing. Those who do not will be unable to raise money at any price. We also think several growth-stage companies with good unit economics will successfully go public late in 2024.
9. AI/large language models (LLMs) are useful and adopted for many use cases
At first glance, this may seem obvious. The non-obvious part of our prediction will be the breadth of use cases ranging from cancer genomic data interpretation, call center support, chronic disease management, and clinical documentation. Unlike many new healthcare technologies, user satisfaction will be high. AI/LLMs will live up to the hype. However, the “thin veneer AI interface on top of someone else’s LLM” companies will quickly (2-4 years given that is a typical financing cycle) fall into obscurity given commoditization and thin margins.
10. VC-backed brick-and-mortar healthcare services startups crumble
In recent years, Warby Parker-esque-inspired retail healthcare was all the rage, led by One Medical. However, it turns out that capital-intensive, low-margin structures and high patient churn make these businesses smaller and harder to scale than people thought–especially in a world with a higher cost of capital and where growth is too expensive. Some may be able to cut expenses to break even and others may be rescued by private equity roll-ups, but many will close up shop.
Our evergreen predictions
We are sticking with our 2022 evergreen predictions, including prediction #1 that big tech will continue to be terrible at healthcare. While Microsoft’s partnership with OpenAI and Nuance may be interesting, we will believe it after it is widely adopted by clinicians.
Evergreen prediction #2: Non-profit blues will not merge to achieve the scale needed to compete. While BCBS LA tried and BCBS VT may succeed, we think the regulatory headwinds that emerged for these deals make it less likely that other plans will try.
We look forward to reporting back to you in a year. If you agree, disagree, or have a prediction of your own, please share it with us on X at @bobkocher and @brobertsvc. In the meantime, we wish you a safe and happy holiday season and 2024.
Bob Kocher and Bryan Roberts are partners at the venture capital firm Venrock, where they invest in healthcare businesses.
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The opinions expressed in Coins2Day.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Coins2Day .
