Since 2019, the United States healthcare industry has experienced substantial financial pressure, with industry EBITDA as a proportion of the National Health Expenditure declining by an estimated 150 basis points (Exhibit 1). The decline has hit payers and providers particularly hard—payers’ estimated margins in 2024 could be at their lowest in a decade. Inflationary pressures have not yet been fully absorbed within the healthcare system, and providers continue to face labor shortages. Adding to these challenges is constrained reimbursement growth, where providers are dealing with a shifting payer mix, as the share of Medicaid and Medicare enrollment grew from 43 percent in 2019 to 45 percent in 2023.
Utilization rates remain below pre-COVID-19 pandemic levels, adding uncertainty for payers related to patient demand in the years ahead. Medicare Advantage (MA) plans face rising costs linked to the Inflation Reduction Act, limited rate increases approved by the Centers for Medicare & Medicaid Services (CMS), and additional revenue pressure from risk adjustment and policy changes regarding Star ratings.1 Medicaid enrollment has declined due to eligibility redeterminations while the remaining higher-risk population has claims expenses higher than the current rates. As such, Medicaid managed-care economics will continue to be affected as rate revalidation in many states typically lags behind change in claims trends.
Healthcare players should also consider potential policy and regulatory changes that might arise in the coming years from the 2025 change in federal government administration. Amid these challenges, the industry is also undergoing a shift in growth dynamics. Industry segments such as health services and technology (HST) and specialty pharmacy-related services represent an increasing share of industry EBITDA, rising from 16 percent in 2019 to an estimated 19 percent in 2024. HST revenue pools are expected to grow at an 8 percent CAGR from 2023 to 2028, underpinned by double-digit growth in software platforms and advanced data and analytics through sales of innovative technologies (for example, generative AI) to providers and payers. Pharmacy services could see continued growth, particularly those with a focus on specialty pharmacy. Growth could be driven by increased utilization and new therapy launches. Specialty pharmacy revenue is also expected to rise at an 8 percent CAGR from 2023 to 2028, increasing EBITDA for specialty pharmacies and managed service providers.
In this article, we use EBITDA as a measure of economic health of the industry. Only a fraction of EBITDA translates into net income for the industry, with net income margins in the low single digits after accounting for interest, taxes, depreciation, and amortization. EBITDA returns enable organizations to generate the capital necessary for investments, including those for enhancing capacity and access, building capabilities to deliver new and improved treatments and patient experience, and for technology-driven transformation.
In this year’s report, we provide a perspective on how the recent challenges have affected payers, health systems, HST, and pharmacy services, and what to expect in 2025 and beyond.
Many segments are expected to recover and some will experience accelerated growth
We estimate that healthcare EBITDA will increase at a 7 percent CAGR to $987 billion in 2028 from a baseline of $676 billion in 2023 (Exhibit 2). In many segments, improvement could come from recovery from post-pandemic lows (for example, in most payer and provider segments); in other areas, growth will accelerate (for example, HST and specialty pharmacy).
More specifically, we expect to see changes in the following four areas:
- Payer: A combination of factors is likely to drive the recovery of margins, including administrative and medical cost improvement actions, product and pricing optimization, and payer exits and consolidation.2 In addition, increases in the Medicare and Medicaid duals (members who qualify for both Medicare and Medicaid) population as well as third-party administrator offerings in commercial insurance are expected to deliver material growth.3
- Provider: Outpatient care settings, including ambulatory surgery centers, are growing due to site-of-care shifts.4 Substantial shifts have occurred in the home health area post-pandemic in response to patient preferences. Home health continues to expand as a result of increased technology-driven nursing efficiency and fiscal intermediary models (where individuals are allowed to work for loved ones as a caregiver and get paid by the state for that service). Physician services are also expanding the scope of care through integrated ancillary procedures in office and payers’ focus on encouraging treatment of patients in lower-cost sites of care.
- HST: Software platforms continue to have a growing role within the healthcare ecosystem, enabling providers and payers to become more efficient in an increasingly complex environment. Technological innovation (for example, generative AI and machine learning) is creating opportunities for stakeholders across segments by automating workflows, promoting data connectivity and interoperability, and generating actionable insights.5 As these innovations mature, providers and payers are likely to continue seeking outsourced support to deploy practical use cases, potentially creating large value pools for software platforms and advanced data and analytics businesses that can offer healthcare-tailored services.
- Pharmacy services: Specialty pharmacy revenue will continue to experience rapid growth due to increased utilization and pipeline expansion (for example, in oncology). The growing use of specialty drugs is expanding specialty pharmacy profit pools, including provider settings, where hospital-owned specialty pharmacies are projected to show more than a 10 percent EBITDA CAGR. Physician offices and ambulatory infusion sites are projected to show high growth due to payer site-of-care policies encouraging lower-cost settings and patient and caregiver preferences.
Additionally, certain sub-segments will continue to face pressure. Those include general acute care within health systems, because of site-of-care shifts to non-acute settings; the non-dual-enrollee Medicaid line of business as a result of redeterminations and changes in acuity mix within payers; and retail pharmacies because of reimbursement pressure and a plateauing of generic dispensing rates.
Several factors will likely influence shifts in economics, including changes in payer mix and return of utilization.
Change in payer mix
Enrollment in MA, and particularly the duals population, will likely continue to grow. MA enrollment has risen by 9 percent annually from 2019 to 2023. We estimate the membership growth rate will slow to 5 percent annually from 2023 to 2028, driven by a slower increase in population of people 65 years old and over, product optimization measures taken by payers to support return to sustainable economics, and expected market consolidation, with smaller payers exiting the business.6 The dually eligible population enrolled in managed care is estimated to increase at more than a 6 percent CAGR from 2023 through 2028.
We estimate that commercial-segment profit pools will rebound, as EBITDA margins are likely to return to historical averages by 2028. The exception may be the group fully insured business, which we estimate could still be below pre-pandemic levels in terms of margin percentage. Growth is likely to be partially offset by enrollment changes in the segment, prompted by a continued shift from fully insured to self-insured businesses that could accelerate as employers seek to cut costs in the face of rising premiums. Individual segment enrollment is expected to rise through 2025, driven by enhanced subsidies, Medicaid redeterminations, and potential employer conversions through the Individual Coverage Health Reimbursement Arrangement (ICHRA) under the Affordable Care Act.
However, EBITDA in the individual segment is expected to decline in 2026 and 2027, largely due to the anticipated expiration in 2025 of the subsidies expansion in the American Rescue Plan Act of 2021. That could lead to a membership reduction of about 7 million over two years as healthier members are more likely to leave, resulting in a worsening of the risk pool. By 2028, the segment is expected to stabilize, with long-term EBITDA margins projected at 3 to 4 percent.
Medicaid enrollment declined by about 6.5 million in 2023 and could fall further by 2.5 million to 3 million lives over 2024 and 2025, our estimates show, given federal legislation allowing states to begin eligibility redeterminations (paused during the federal public health emergency declared at the start of the pandemic).7 Estimating the impact of these changes will challenge Medicaid players as the ability of states to readjust managed care organization rates may be slow due to a lack of real-time data.
Return of utilization
Our estimates indicate that in 2023, utilization rates for high-cost surgical procedures had not yet rebounded to pre-pandemic levels (Exhibit 3). In the commercial population, utilization remains 7 percent below 2019 levels, while Medicare fee-for-service utilization is down by 2.5 percent. As utilization continues to climb in 2025, short-term challenges may result for already financially strained payers facing increased claims costs. However, this rebound should support revenue growth for providers. Utilization may not return to the pre-pandemic level, as the decline is partly due to mortality during the first years of the COVID-19 pandemic (2020 to 2021). Additionally, much of the returning care is anticipated to shift toward non-acute settings, such as ambulatory surgery centers, mitigating the full cost impact of increased utilization. Utilization in other areas like behavioral health and telehealth that rose substantially during the pandemic will continue to grow, albeit at a constant rate.
Payers: Government segments are expected to be about 75 percent larger than group commercial segments by 2028
Let’s look more closely at segment performance. In 2024, overall payer EBITDA is estimated at $52 billion. Looking ahead, we estimate EBITDA to rise at a 7 percent CAGR from 2023 to 2028 to $78 billion as the market recovers, and several segments approach pre-pandemic EBITDA. The likely recovery drivers include margin recovery of the commercial segment, inflation-related incremental premium rate rises, and increased participation in managed care by the duals population. Recovery will likely to be partially offset by margin compression in MA due to regulatory changes in risk adjustment, declines in MA stars bonuses, and technical updates.
Our estimates suggest that the overall mix of payer EBITDA is likely to shift further toward the government segment. Overall, the EBITDA for this segment are estimated to be about 75 percent greater than the commercial segment by 2028 ($37 billion compared with $21 billion). This shift would be a result of increasing MA enrollment, with MA penetration estimated to reach 54.6 percent of the total Medicare population in 2028, and likely continued enrollment growth in the duals segment (Exhibit 4).
MA margins saw pressure in 2024, dropping to 1 to 1.5 percent, with 46 percent of entities below EBITDA breakeven in 2023.8 We attribute the decline to lower CMS rate increases, changes in risk adjustment, and about a 5 percent rise in costs due to utilization pressure, including the impact of the Inflation Reduction Act on Medicare Part D (the prescription drug benefit). However, starting in 2025, we anticipate a recovery of 150 to 200 basis points, leading to a rebound to long-term margin of 3 to 3.5 percent by 2028. Expected drivers here include the likelihood that payers will pursue product optimizations as well as market consolidation, as smaller loss-making carriers exit the market. Potential reductions in member acquisition costs, linked to CMS’s proposed adjustments to agent compensation, and an acceleration in value-based care (the growth of which is estimated to accelerate by 2 to 4 percent annually) will also play a crucial role.
A decline in Medicaid enrollment could shift the risk mix adversely and further strain margins compared to peak levels in 2021 and 2022. The acuity shift to a higher risk population mix, with healthier members leaving, combined with the typical lag in rate revalidation, is increasing medical loss ratios. We would expect that Medicaid rates will readjust as adequate claims data become available for the rate revalidation process. In prior cycles, we have seen this process take 18 to 24 months.9
EBITDA for the commercial segment declined from $17 billion in 2019 to $13 billion in 2023. Payers are likely to raise premiums by 2.5 to 3 percentage points more than the historical range to compensate for higher provider-rate increases, higher utilization, and other increased costs; however, the increased revenue may not fully transfer to payers, with employers and individuals buying lower-priced plans (also known as buy-downs). We estimate the commercial segment’s EBITDA margins to recover by 2028, and reach $21 billion, growing at a 10 percent CAGR from 2023 to 2028, but margin percentages are expected to remain below pre-pandemic levels. Within this segment, a shift from fully insured to self-insured businesses could accelerate in the face of rising premiums, and potentially more in the event of an economic slowdown. The fully insured group enrollment could drop from 53 million in 2023 to 49 million in 2028, while the self-insured segment could increase from 110 million to 114 million during the same period.
Providers: Non-hospital segments expected to see accelerated EBITDA recovery
In 2023, provider EBITDA grew to $263 billion, but still fell short of pre-pandemic levels due to input costs such as supplies, inflation, and labor shortages. While patient volumes are gradually recovering, they remain below 2019 figures; volumes are expected to return to pre-pandemic levels by 2025. However, the growth in utilization is expected to be partially offset as care shifts to non-acute settings such as ambulatory surgery centers and home health, limiting the potential for revenue growth. At the same time, providers are carrying out revenue and cost transformations and implementing cost-containment measures. These steps are expected to improve EBITDA margins by 100 to 150 basis points by 2028.
Looking ahead, we estimate an 8 percent CAGR from 2023 to 2028, with total provider segment EBITDA reaching $385 billion by 2028 (Exhibit 5). This reflects a recovery from the 2023 dip below historical norms, driven by ongoing transformation initiatives and the potential for higher reimbursement rates. Hospitals are likely to pursue higher reimbursement increases by 200 to 250 basis points during insurance contract renewals over the next three to four years to offset recent cost inflation. Additionally, hospitals will continue to prioritize labor productivity improvements and technological innovations that could increase EBITDA margins from 7.8 percent in 2024 to 8.6 percent by 2028.
Non-hospital segments are expected to grow substantially as in recent years, particularly in segments such as home health. Skilled home health growth is driven by patient preference to be treated at home, combined with technological enablement that enhances nursing efficiency, such as auto-fill forms, e-fax bots, and speech-to-text. Personal care services are projected to rise at a 10 to 12 percent CAGR from 2023 to 2028, driven by strong demand and the fiscal intermediary model where individuals can work for loved ones as caregivers and get paid by the state for that service.
Additionally, care continues to shift from acute settings to ambulatory surgery centers (ASCs). While procedures such as colonoscopies have reached high penetration and exhibit flat growth in ASCs, newly approved procedures, such as knee and hip arthroplasty and certain cardiovascular surgeries, are expected to drive both volume and margin growth in the ASC setting. Site-of-care shifts are expected to benefit physician services as well, partly due to the integration of ancillary procedures (such as radiology and diagnostic lab testing) in physician offices and payers’ prioritization of specialty spending management to control costs and place more care out of hospital settings. Diagnostic segments, such as independent labs, are also seeing reduced volume growth compared to the COVID-19-driven highs. Among post-acute care segments, most sectors are growing along with an aging population, with skilled nursing facilities an exception because of challenging labor dynamics and the shift to home health.
HST: Rapid growth will continue in advanced technology-based segments
HST is projected to continue as the fastest-growing sector in healthcare (Exhibit 6). In 2024, HST EBITDA grew to $67 billion, reflecting vendor price increases, reduced wage pressure, and the early returns of pandemic-era technology investment that is beginning to fulfill its potential. Additionally, the rate of outsourcing is estimated to continue increasing as both providers and payers look to invest in new technologies to improve performance (for example, generative AI and advanced data and analytics). Looking ahead, we estimate a 9 percent CAGR from 2023 to 2028, with HST EBITDA estimated to reach $100 billion by 2028.
Four factors account for the anticipated growth trajectory in HST. First, we expect continued outsourcing from payers and providers searching to improve efficiency, ease margin pressures, and implement new technologies. Second, payers and health systems are likely to continue accepting vendor price increases for solutions that deliver measurable improvements and return on investment. Third, the gradual shift in value pools from services to software is expected to drive improved margin profiles for HST players. Fourth, continued consolidation of HST players could also increase access to innovative solutions through interconnected customer networks and improve HST vendor efficiency through operational synergies.
The emergence of integrated datasets and new technologies presents opportunities for HST value creation across segments. Adoption of advanced technologies is increasing, particularly generative AI. More than 70 percent of healthcare organizations are pursuing generative AI proofs-of-concept or already implementing generative AI solutions.10 The technology is poised to be disruptive, potentially increasing demand for HST players to implement best-in-class use cases, automate and streamline manual processes of customers, and improve the efficiency of HST vendors by augmenting workforce productivity. This innovation is creating large value pools for HST software platforms and data and analytics players, driving an estimated EBITDA from 2023 to 2028 of 14 percent CAGR and 20 percent CAGR, respectively.
In 2024, there was weaker merger and acquisition activity in HST, continuing the slowdown that occurred in the second half of 2023 as a result of elevated inflation rates and macro-economic uncertainty.11 HST remains fragmented, a segment characterized by intricate workflows, many specialized companies, and a diverse customer base. In 2024, the top 10 HST companies are estimated to account for 26 percent of HST revenue, with the next 100 companies making up only another 15 to 18 percent of total HST revenue pools. As we look ahead, M&A activity is anticipated to increase as private equity firms reach the end of their hold periods and seek to exit long-term investments. In parallel, strategic businesses could look to scale inorganically to lower customer acquisition costs, enter adjacent segments, implement scalable digital technologies, and improve process efficiencies.
Pharmacy: Specialty pharmacy and GLP-1s continue to drive segment growth
The pharmacy market has undergone major changes in recent years, including a rapidly evolving regulatory environment, formation of new partnerships across the value chain, and growing demand for GLP-1 agonists (the type 2 diabetes and obesity medications). Total pharmacy dispensing revenue continues to increase, growing by 13 percent year-over-year to $620 billion in 2023, with projections of a 5 percent revenue CAGR from 2023 to 2028, reaching a total of $800 billion.12
Specialty pharmacy is one of the fastest growing subsegments within pharmacy services, accounting for about 30 percent of the pharmacy services EBITDA (Exhibit 7). We project the specialty pharmacy segment to grow by more than 10 percent CAGR from 2023 to 2028, driven by increases in utilization as well as the continued expansion of the pipeline of therapies in development (for example, in oncology). Within this segment, central fulfillment specialty pharmacies are facing an evolving landscape, including contract pharmacy changes related to the 340B Drug Pricing Program. The specialty pharmacy subsegment has also seen accelerated investment in hospital-owned pharmacies and growth of existing hospital pharmacy programs.
Retail and mail pharmacies continue to experience margin pressure and a contraction of profit pools due to declining reimbursements from private and government payers, labor shortages, inflation, and a plateauing of generic dispensing rates.13 In an effort to address some of these challenges, new reimbursement models have been introduced, with a focus on shifting to cost-based reimbursement models and service-linked dispensing fees. Many national chains have also announced plans to rationalize store footprints as they assess retail performance, including both pharmacy operations and front-of-store operations.
Pharmacy benefit managers (PBMs) are facing calls for increased transparency from payers and plan sponsors amid an evolving regulatory and legislative landscape. In 2023 and late 2024, the three biggest PBMs announced new offerings seeking to provide cost-based pricing for prescription drugs and pharmacy services and increased transparency around net costs. These models seek to improve transparency and simplify pharmacy economics; uptake of the new offerings compared to traditional models by employers and plans will continue to evolve through the course of 2025.
Over the past two years, the market has witnessed increasing demand for GLP-1s. Despite supply-chain disruptions and continued deliberations about insurance coverage decisions, there has been rapid expansion of telehealth services, compounded offerings, direct-to-consumer dispensing, and increased use of discount cards in efforts to increase access and affordability of GLP-1s.
Overall, patient affordability, cost containment, and transparency will likely remain key themes in the sector. The Inflation Reduction Act continues to substantially change the Medicare prescription Part D benefit, with a focus on reducing beneficiary out-of-pocket spending, negotiating prices for select drugs, and changes in government reinsurance. This evolution, coupled with increased demand for GLP-1s and high-cost specialty therapies, has set the stage for increased focus on care, payment models, and retained profits along the value chain.
The National Health Expenditure has continued to increase, as an aging population seeks more healthcare services. The US healthcare industry, though, has faced challenging conditions arising from the pandemic that continued in 2024, including high inflation rates, labor shortages, and constrained funding. In this environment, the industry has continued to adapt through performance improvement efforts as well as pursuing growing segments like HST and specialty pharmacy. We expect the EBITDA recovery to continue in most segments through accelerated performance improvement efforts, including greater application of technology, as well as growth in areas such as the Medicare and Medicaid duals population, software, data, analytics, and specialty pharmacy.