M&T Bank Corporate Healthcare Group Outlook

Author: Louis Galanis

Approaching the four-year anniversary of the onset of the COVID-19 Pandemic, the U.S. Healthcare sector, which has navigated through unprecedented challenges, continues to rapidly evolve given developments in demographic, political, and economic conditions. The acceleration in this evolution seems more pronounced than ever, as the long-anticipated aging needs of the ‘Baby Boomer’ generation come center-stage, inflationary pressures eat into both personal and corporate budgets, and as some care quality metrics face declines. While the healthcare landscape can be both intricate and broad, we try and view it from a simplified point-of-care services perspective (hospitals, pre-acute, post-acute, primary care physicians, pharmacies) and a supplier perspective (equipment, supplies, med-device, biotech, pharma, tech, research), understanding that there is plenty in between and some cross-over throughout. Although our primary focus within Corporate Healthcare falls with companies within this supplier cohort, both sides are highly interconnected, and we believe that opportunity for growth can be found in pockets of both sides. As such, our analysis herein aims to understand what’s impacting the healthcare system as a whole. To help understand our big picture point of view, we have attempted to generalize the healthcare landscape at a high level through the image below, further acknowledging that there is much more complexity than displayed (niche suppliers, distributors, fintech, other wholesalers/brokers).

A Transitioning System

To envision the future of healthcare dynamics, we must first understand where the structure stands now. The U.S. healthcare system has historically operated a fee-for-service model, in which providers are paid a set amount per service delivered, which ultimately incentivizes volume as opposed to quality care. As such, in an effort to improve patient outcomes and decrease spend, slightly after the beginning of the new millennium the country started a multi-decade transition to a value-based care system, in which providers are rewarded for the quality of care they deliver. Notable progress has been made over the past decade, but still over 40% of payments continue to have no link to quality and value care, as tracked by the Health Care Payment Learning & Action Network1. While this implementation of value-based care should ultimately control costs in the healthcare system (U.S. has the highest costs per capita globally per KFF analysis of National Health Expenditure (NHE) and The Organization for Economic Co-operation and Development (OECD) data) and improve patient outcomes, the remaining push now comes at a time when providers are facing significant external pressures. Multiple factors including historic inflation driving up the cost of medical supplies and equipment, labor shortages, increased regulation (e.g., No Surprise Act), and rising drug prices have hampered providers financial performance in the face of rising patient needs. As a result, headlines about staffing shortages, employee strikes, facility closures, and declining quality of care have seemed to become more prevalent over the past few years. 

Boomer Boom

To further understand how the system will evolve going forward, it’s important to start with a baseline of some high-level demographic trends. When looking at the U.S. population census figures, the number of older adults (65+) is at historic rates, up 34% from 43MM in 2012 (14% of the total population), to 58MM in 2022 (17% of the total population). While this may seem like a substantial increase, this figure is projected to swell to 81MM by 2040. Additionally, the number of adults in their 80’s is expected to grow rapidly as the oldest of the Baby Boomers reach age 80 in 2026.

Unfortunately for the average person, increased age comes with increased need for healthcare products and services. The next question then becomes, how and where will this care take place?

With this ‘Baby Boomer’ cohort moving into retirement, there has been a clear preference toward aging-in-place and alternatives to the classic nursing home progression. As such, alternatives to nursing homes have emerged that provide care directly in homes and communities, such as assisted living and memory care. These at-home care options have expanded significantly in recent years, including Medicaid-funded home and community-based services that are less intensive. While this option likely won’t be possible for everyone, we believe technology should help support this trend into the future, leaving facility-based options more prevalent only for those with more strenuous healthcare needs.

Point-Of-Care Stress

Whereas these dramatic demographic changes should suggest that demand for facilities such as nursing homes would likely remain strong despite the at-home preference, the number of CMS (Centers for Medicare & Medicaid Services) certified nursing facilities available in the U.S. has continued to contract since 2015. The pandemic accelerated this trend, with families having increasingly negative views on nursing homes given the number of COVID-related deaths stemming from nursing home facilities. Additionally, labor shortages have led to headaches for nursing home operators and ultimately, declining levels of care quality and capacity. As such, the U.S. has over 600 fewer CMS certified nursing homes than it did eight years ago (-4.1% decline since 2015) and over 163,000 fewer residents (-11.9% decline since 2015).

In areas where losses of certified beds are among the steepest (i.e.  Massachusetts), hospitals have in turn been impacted as patients have had to wait for openings at post-acute care facilities and nursing homes to be transferred. This has led to delays at hospitals across the U.S., adding to emergency-department backlogs and the number of occupied beds within hospitals. While staffing levels have recovered at hospitals and ambulatory care centers since the worst of the pandemic per Labor Department statistics, notable labor shortages still remain at nursing homes, worsening this aforementioned bottleneck.

With these labor headwinds still persisting, increased safety regulations could require even higher staffing levels at nursing homes, as new and pending policy plans to set a minimum time that nursing home staffers must spend with each resident. According to KFF, an independent health-policy research nonprofit, about seven out of every ten nursing homes don’t have enough nursing employees to dedicate four hours a day to each resident (CMS studies have previously deemed 4.1 hours of direct nursing care to avoid increased risk of harm). As such, we expect hospitals, nursing homes, and other points of care to continue to face difficulties as they sort through the best ways to solve operational headwinds while dealing with increased regulatory scrutiny around care metrics and billing practices, as well as increased patient demand. We do expect that these continued headwinds may be slightly less extreme than in the past few years as the cooling labor market eases staffing struggles, COVID-related supply chain disruptions steadily dissipate, and as interest rates are expected to decline (Fed currently penciling in three rate cuts throughout 2024).

Another bright spot could come with efficiencies realized through healthcare technology and systems that gain increased momentum. We expect more innovation (particularly AIbased) in equipment, devices, robotics, technology, and payments, though recognize that large purchases and undertaking of system transitions will come with significant cost-benefit analysis by existing providers who weigh the upfront costs while simultaneously dealing with tighter budgets. Additionally, when taking an additional step back, another strategy to help ease the strain on the U.S. healthcare system will come from a focus on preventative care. This will likely include more screenings, tests, wearable devices, and even medications (i.e. obesity drugs) to track and prevent more costly diseases and health complications in the future.

Paying the Price

When it comes to costs within the healthcare system, drug prices have come under particular scrutiny in recent years. This sentiment has made ripples through to regulatory action built into the Biden Administrations Inflation Reduction Act. The Act empowers the federal government to negotiate prices for top drugs covered by Medicare Part B and Part D, requires companies to pay rebates to Medicare if prices rise faster than inflation for drugs used by Medicare beneficiaries, and caps out-of-pocket spending for Medicare Part D enrollees, among other items. Regarding negotiated pricing, the first ten drugs to be negotiated were selected in September of 2023 (see ‘Medicare Drug Price Negotiation’ exhibit), 

Medical Drug Price Negotiation

with negotiations to go through August of 2024, and the final negotiated prices not going into effect until 2026. Based on the Act, this list will include 60 drugs by 2029. While this will only impact a relatively small number of drugs, it is too early to see the true impacts, which many argue could dampen incentive for R&D and innovation. Another key area to focus on in regard to drug pricing mechanics is the relationship between pharmacy benefit managers (PBM’s) and pharmacies themselves, as BM’s have come under public and political pressure in recent years for the lack of pricing transparency provided to consumers. It was recently announced that CVS Health, both the nation’s largest drugstore chain and PBM (Caremark), would move away from using complex formulas to set the prices of prescription drugs it sells. Through this new plan, the retail pharmacies would be reimbursed by PBM’s and other payers based on the amount paid for the drugs, plus a limited markup, and a flat fee to cover other services involved in the handling and dispensing of such prescriptions. This is similar to how Mark Cuban’s Cost Plus Drug Co. operates, among other recent entrants, who have gained significant traction over the past year given the transparency they have brought around drug pricing. Under the existing, more complex model, pharmacies could be paid relatively higher rates for certain medications, which it could then use to subsidize losses on other prescriptions. This would no longer generally be the case under the new cost-plus model. Ultimately, the trend of transparency in pricing will likely continue as pressure to find excess costs throughout the system intensifies.

Living in Synergies

We expect to see elevated levels of M&A in 2024 across the entire healthcare ecosystem, as the initial interest rate shock of 2023 fades with now expected cuts throughout 2024 and beyond, and as many companies note more reasonable purchase multiples are being seen than in years prior. In an effort to try to ease aforementioned cost pressures on the care provider side, M&A is expected as companies seek synergies to find ways to reduce cost structures. These transformative transactions can come in the form of providers merging with or buying other providers, or through a semi-vertical integration approach, such as with CVS’s 2Q23 $10.6Bn acquisition of Oak Street Health or even Amazon’s 1Q23 $3.9Bn acquisition of One Medical (both Oak Street and One Medical are primary care providers).

A common trend over the past couple of years on the supplier side has been the spin-off and rebranding of healthcare business from large conglomerates including General Electric (GE Healthcare), PerkinElmer (Revvity), Colfax (Enovis), and 3M (Solventum - expected 1H24), which ultimately concerts investor and operational focus on these individual businesses as opposed to being a second thought to other business lines competing for attention. Additionally, there have been multiple spin-offs of consumer health business lines announced and completed by pharmaceutical companies including Johnson & Johnson (Kenvue), Pfizer and GSK (combined into Haleon), and Sanofi (in process). These spin-offs come as companies seek to focus on core competencies and raise funds to support development and purchase of future drugs for their pipelines. These transactions further provide the spun-out entities resources to focus on their own competencies, with strong stable bases to support market expansion through bolt-on M&A. As such, we expect cash provided by spinouts to be used for large scale M&A in pharma and that a number of the spun-out healthcare businesses will be active in the small to-medium sized M&A to build scale. Zooming in further, as the pharmaceutical industry is facing a large patent cliff in the U.S. and increasing drug pricing regulation, it will continue to be near record highs, and with higher rates and a tighter funding environment, earlier stage, less diversified companies may be more prone to realize value through a sale. As detailed in the chart below provided from a study done by Evaluate Pharma, from 2024 through 2030, there are ~$250Bn in sales at risk due to patent expiration, which represents the largest patent cliff in history. As such, toward the end of 2023 we saw large acquisitions announced by companies that stand to be impacted by this dilemma, including Bristol-Myers Squibb (purchased Karuna Therapeutics for $13.8Bn and RayzeBio for $4.2Bn) and AbbVie (purchased ImmunoGen for $9.5Bn and Cerevel Therapeutics for $9.1Bn). As such, we expect significant consolidation in the industry over the coming years, which will lead to a variety of large, well-diversified players – though we note that with this M&A will likely come regulatory scrutiny. Another side thought is that companies with broad portfolios of generics could stand to benefit as new revenue streams become available and will therefore gain financial strength.

Patent Chart

Keep Your Eye On

The GLP-1 (Glucagon-like peptide 1) hype train has taken off in recent months as certain medications that were primarily approved for and used to treat diabetes, have gained traction for those looking to lose weight. Medications such as Ozempic (Novo Nordisk) and Mounjaro (Eli Lilly), among others, have drawn significant interest as obesity has proven to be highly correlated with cardiovascular disease, kidney disease, certain cancers, and numerous other health complications. Therefore, the thought is that if these drugs can safely morph demographics in regard to people that are overweight or obese, which according to CDC studies suggest could represent over 35% of U.S. adults (and increasing), they could change dynamics across healthcare and consumer preferences. While the long-term effects are still yet to be unraveled, equity markets rotated significantly based on perceived changes these developments could have. Although the longterm benefits of these drugs could bring down overall healthcare costs, many employers have retracted coverage for obesity treatment, given the high costs currently associated with the drugs. While this is currently the case, with so much hype in the space, we expect better treatments with fewer side effects to become available over time, and that prices will likely begin to trend downward. Overall, GLP-1's have been around for almost 20 years now, and while the spotlight has been refocused on the benefits of weight loss with the newer version semiglutide drugs, it is unlikely that these drugs will eradicate obesity and Type-2 diabetes (as markets initially reacted to), and ultimately growing, aging, and sicker population trends will likely continue to drive demand across multiple sub-sectors that were initially hit by market overreaction. With that said, if proven effective, further developments could lead these drugs to become more accessible and widespread, which could more materially shift the landscape surrounding obesity and correlated health issues.

Also gaining notable headlines were developments in the Nobel Prize-winning gene-editing technology, known as Crispr, as the U.S. approved the first medicine to utilize the technology in December of 2023 for a treatment developed by Vertex Pharmaceuticals and CRISPR Therapeutics for people with sickle-cell disease. These genetic therapies show significant promise, treating disease by making changes in a person’s DNA, which ultimately should make treatment easier to administer while resulting in fewer side effects. While Crispr technology was initially discovered over a decade ago, the arrival to commercial markets can be viewed as coming relatively fast. At such an early stage in the development of this technology, these initial treatments are very intensive, requiring weeks in the hospital and chemotherapy to make room for the modified cells, and expensive (~$2.2MM per patient). We expect that this technology will continue to draw significant investment in coming years and that further developments will be made to help treat cancers, heart disease and  other rare genetic diseases, but that we are still in the very early innings in regard to full scale commercial rollout. This will continue to be something to follow closely, with this first FDA approval possibly opening the door for other use cases that have been in development.


Although the transition to value-based care has been a challenging process given the macro landscape in recent years following the COVID-19 pandemic, the goal is to ultimately cut excessive costs out of the expensive U.S. healthcare system, such that it can support growing demands of the aging population while providing higher-quality care. As such, the focus will have to be both on gaining efficiencies through technological advancements and a focus on preventative care, such that the point-of-care part of the system is able to find an equilibrium in which it can keep up with rising levels of demand. The need for efficiencies will further drive consolidation across the entire healthcare landscape through M&A, particularly within healthcare services and bio-pharma. As such, we believe that a multitude of companies will seek capital in the coming years such that they can both develop and implement new technologies, acquire and merge with other firms, and overall provide better outcomes for the U.S. population in a more efficient manner. In an ever-evolving market, this transition will not come without winners and losers, but in understanding these trends from both a high-level industry point of view down to the individual company level, we feel there will be plenty of opportunity to support companies that will better both the American and global healthcare landscape.

1 http://hcp-lan.org/workproducts/apm-methodology-2023.pdf

Louis Galanis

Senior Vice President

Corporate Healthcare

Email: lgalanis@mtb.com

Phone: 781-265-9682

Louis is responsible for the origination and expansion of client relationships, working with corporate healthcareband life science companies nationally to structure credit and other banking solutions to their needs. He has several years of experience on the Corporate Banking Team, holding both SIE and Series 79 licenses as well as a Bachelor of Science in Finance from Bentley University.

Darci Buchanan


Corporate Healthcare


Phone: 410-291-7782

Darci, with over 25 years of corporate client experience, has worked at M&T for the past seven years. She works with healthcare and life sciences clients nationally, providing expertise on financing options, and assisting clients in finding banking services and solutions that fit their needs.