Most of the policy and health responses to Covid-19 have focused on attempts to contain the pandemic and return to some semblance of a normal economy—albeit a different normal than a year ago. But the pandemic also exposed cracks in the healthcare system, such as shortages of critical medical supplies and personal protective equipment, limited coordination of early diagnostics, mixed readiness for modern healthcare delivery models such as telehealth, and historically offshored healthcare supply chains. At the same time, the pandemic underscored that healthcare is a critical piece of national infrastructure, not just another business sector.

Over the course of 2020, we saw government investment in the healthcare industry unlike any other year in modern times. The degree of public funding for healthcare, the embrace and reimbursement of innovative emerging care models, moves to encourage R&D collaboration, which accelerated vaccine development to an unprecedented pace, and the push to shore up domestic supply chains for critical medical equipment all demonstrate ways that healthcare can radically improve.

The notion of healthcare as national defense began to take hold in 2020, but what are the implications of this mindset? During Operation Warp Speed, the US government appropriated and deployed nearly $18 billion of investments to fight Covid-19 through public-to-private partnerships across the healthcare value chain. What other major healthcare problems will governments target in the coming year?

• Will we finally see major infrastructure investments in healthcare IT to fix longstanding interoperability and data flow limitations? Many other industries are modernizing, while the healthcare industry spends comparatively less on IT infrastructure. In the US, only 4.3% of healthcare provider spending goes to improve IT systems, according to Gartner. That is just over half the average allocation in banking and one-quarter less than in education. Limitations of today’s often siloed healthcare IT systems, such as the difficulties of site-to-site patient tracking, have frustrated many healthcare participants and now have the potential to delay vaccination efforts, providing an argument for potential government interventions.
  
  
• Will we begin to see leadership in innovative healthcare coverage from public payers? There have long been disparities between coverage and reimbursement rates for public and commercial insurers, with associated distorted cross-subsidies. However, during the pandemic, the US Centers for Medicare & Medicaid Services was quick to make changes to provide reimbursement for innovative models like telemedicine and hospital at home, in response to the sudden problems with traditional care delivery.
  
  Coming out of the crisis, will there be a more widespread government embrace of concepts that emerged over the past year? The question has been asked before, but perhaps the pandemic can catalyze a transition to more fee-for-value type models and away from the fee-for-service paradigm that has led to a number of structural challenges.
  
  While it remains unclear to what degree governments will expand their role in healthcare, the industry is being viewed in a different light as we work to overcome the Covid crisis. Although other governments around the world operate with different healthcare models than the US, many are wrestling with similar questions.
  
  

• How will the future of pharma R&D evolve to harness the collective power of the greatest industry and academic minds to deliver innovative treatments? How did we develop and deploy a vaccine in record time? It was aided by new ways of working, new technologies, and increased government funding. Meanwhile, the global pandemic catalyzed an unprecedented level of collaboration as researchers quickly mobilized to share their data across the globe. New tools, technologies, and processes were deployed to speed up drug development by enabling collaboration across leading scientists around the globe and facilitating virtual clinical trials. Given the successes observed during vaccine development, perhaps we will see greater use of collaboration for therapeutic developments in the future.

The structural, macro, and market factors discussed throughout this report will no doubt continue to lift healthcare private equity. Opportunities to extend development of platforms will continue to open up, especially as subscale assets struggle with prolonged effects of the pandemic.

The healthcare private equity market may get even more active in 2021 as the backlog of disrupted deals from 2020 returns to baseline level. This mass of stalled deals will take some time to work its way through the system, but the strongest assets could quickly reach markets early in the year.

Plenty of investment themes are starting to emerge or to achieve their full potential:

Healthcare providers

• Provider buy-and-builds in new therapeutic areas and contexts, such as next generation senior-care based models
• Next generation home-based healthcare models
• Risk-bearing provider models and assets with exposure to Medicare Advantage (MA) patients and plans
• Direct contracting plays and expansion of these models to commercial and Medicaid populations
• A sharper focus on key episodes and conditions that require shifts to new models of care, such as behavioral health and post-acute care
• Expanding across borders within European and Asia-Pacific provider platforms

Healthcare payers

• Expanded supplemental benefits for MA patients
• Next-generation employer navigation and third-party administrator solutions

Biopharma

• Services for the cell and gene therapy value chain
• Pharma services focused on commercialization
• Cold chain and specialty pharma logistics
• Next-generation clinical trials

Medtech

• Technology that facilitates home-care models such as remote diagnostics
• Life science tools and diagnostics

Healthcare IT

• IT for alternative sites of care and nonclinical providers
• Fintech strategies across areas such as revenue cycle management and payments
• Consumer health technology, especially in the Asia-Pacific region

What do investors need to do to succeed in current conditions?

Given rising valuations and heated competition, investors will need to evolve their deal theses in order to thrive. The winners in healthcare private equity will be those that can identify the future implications of Covid-19, riding the momentum of healthcare as a national defense. They will spot analogies from other industries and regions that can be incorporated into their own assets—by, for instance, comparing healthcare IT to technologies in other industries. They will push the thinking on how to implement next-generation solutions to traditional health care models, asking, say, how lessons from MA plans and innovative primary and post-acute care models could be applied elsewhere. They will also craft creative partnerships to overcome historical hurdles, because collaboration may be an essential lever to create value in the future.

In short, investors that can create value by employing unique solutions stand to become the champions that we write about in the years ahead.