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The role for pharma companies in addressing global public health challenges

Key Highlights

The healthcare services and technology market is growing rapidly, which creates opportunities, risks, and structural questions for companies in the sector and those in the broader healthcare value chain.

Services and technology have become the fastest-growing profit pool in the healthcare industry over the past five years, a trend driven by the significant value creation potential of technology-based and -enabled innovations. Major technological advances (e.g., interoperability, advanced analytics, machine learning, digitization, the Internet of Things) have found numerous applications in healthcare—and present important opportunities to address the half a trillion dollars of annual spending resulting from low productivity and waste.

To date, most healthcare services and technology companies have focused on managing medical costs and quality (e.g., through population health management) or on increasing effectiveness and efficiency in administrative functions (e.g., revenue cycle management). In recent years, these companies have delivered billions of dollars in savings, thereby helping to address healthcare cost trends. In return, they have been rewarded by growing profits. In 2016, the companies earned an aggregate EBITDA of approximately $35 billion,1 rivaling other major segments of the healthcare economy (e.g., payers, pharmacy benefit managers, and distributors). For the past five years, aggregate EBITDA has grown faster among healthcare services and technology companies (at about 7% per annum) than among traditional payers and providers.

Given that the available headroom for improvement in healthcare is more than $500 billion, the future growth potential of the healthcare services and technology market is substantial.2 For example, large-scale platform players could emerge to create frictionless markets for healthcare products and services. These players could also become ecosystem integrators—they would integrate a range of different healthcare products and services—so that consumers (patients and their family members) could better manage their own healthcare.

In response to this potential, venture capital and private equity investors alone deployed at least $60 billion into healthcare services from 2012 to 2017. This figure excludes the internal investments made by industry participants, such as payers and technology firms. As a result, the true amount invested is likely even higher.
In this paper, we provide an overview of the healthcare services and technology landscape and profit pool. We then explore four key characteristics of companies that are achieving success in the market. We conclude with two sets of five tests—one for healthcare services and technology companies and one for their customers—that their leaders can use to gauge how prepared and well positioned they are for the future.

About Authors: Prashanth Reddy (Partner - McKinsey)

(Associate partner - McKinsey)

(Senior partner and leader of McKinsey’s Global Healthcare Practice - McKinsey)

(Partner - Mckinsey).