Healthcare is enduring a period of discontinuity on several fronts. Most obviously, the Covid-19 pandemic continues to stress the supply chain, wrench forward the previously gradual progress of digital care, and stretch many sectors thin with labor shortages.

Apart from the pandemic, other structural changes are washing through healthcare systems globally that give reason for optimism. One positive shift is that technological innovations—including digital tools that redefine how patients interact with care, the use of artificial intelligence in drug discovery, and software that enables value-based care—are helping companies build new business models.

Another structural change centers on the relative merits of private markets vs. public markets. True, 2021 set a record number of initial public offerings (IPOs) and special-purpose acquisition companies (SPACs) in healthcare. But many IPOs and SPACs haven’t fared well, and SPACs in particular may face enhanced regulation. The pandemic further tips the balance in favor of private markets, because systemic disruption requires a rapid, nimble response that private ownership better affords. More broadly, the longer time horizon taken by private investors, not metered by quarterly earnings, affords investment in the innovations needed to inflect change in a system.

Because of these developments, the near- to medium-term future may see more healthcare assets going and staying private. The current superabundance of capital has fueled these developments, as new sources such as infrastructure funds, growth-equity funds, sovereign wealth funds, hedge funds, and crossover funds expanded their healthcare investments.

No one can foresee the implications of these discontinuities in detail. Rather, the uncertainties inherent in a time of flux raise the importance of thorough diligence and early planning for value creation. Investors and executives of portfolio companies can benefit by regularly revisiting a set of high-gain questions.

• What’s the impact of Covid-19 finally stabilizing and no longer causing major disruption to the healthcare ecosystem? With widespread vaccination in high-income countries, 2021 marked the emergence of a new normal in some places, despite recurrent waves of novel variants. It’s not clear when Covid-19 will cease posing systemic risks that cause widespread economic disruption. However, the pandemic already has permanently shifted how people live, work, and play, and this has wide-ranging implications for every healthcare sector.
• Will private capital continue to flow into healthcare from new sources and in new forms? Attracted to healthcare’s high returns, recession resilience, and demographic tailwinds, more diverse investors with a broader range of strategies are pursuing opportunities in healthcare. Growth-equity investments helping disruptive innovators scale have surged. And consortium-led megadeals in 2021 broke deal-value records. With healthcare returns expected to remain strong, despite rising competition, we expect investors to continue diversifying how they deploy capital. Rigorous planning for value creation as part of the diligence process will become even more important. One development to watch over the coming years will be the rise of healthcare-focused funds that have a scale comparable to the tech megafunds.
• Will the pace of public-to-private transactions pick up? More for-profit healthcare enterprises may leave public markets so they can pursue transformations or investments in growth areas that increasingly appeal to private investors, given their longer-term outlook. Will we see more Medline- and Athenahealth-sized transactions as investors look to take larger public assets private? As private capital’s involvement in healthcare grows, will it face more regulatory scrutiny?
• Will deal activity continue to become more geographically dispersed? The US’s mix of high spending, large commercial payers, and dynamic capital markets has historically made North America the hub of global healthcare buyout activity. However, the distribution of deals in 2021 continued tilting toward Asia-Pacific, as investors gained confidence in the region’s healthcare assets. Similarly, deal value for biopharma and life sciences tools grew significantly faster in Europe than in any other region. As competition for North American assets continues to rise, will companies in other areas offer better value and attract a greater share of investment? Will more investors look to Europe and Asia as part of their value creation plan?
• How will AI continue to transform every healthcare sector? Artificial intelligence (AI) is already accelerating therapeutic discovery, optimizing supply chains, automating payer and provider back offices, and enabling digital and value-based care models. As AI starts to guide diagnosis and clinical decision making at scale, how will precision medicine and the doctor-patient relationship evolve? How can we protect marginalized populations from the inequities sometimes perpetuated by AI? What role can AI play in addressing labor shortages and clinician burnout?

Looking at individual sectors, these investment themes are likely to emerge or intensify.

Healthcare providers

• Superior clinical outcomes, strategic playbooks for growth, central IT infrastructure, and engaged teams will distinguish successful provider businesses.
• A new wave of specialty practice roll-ups in disciplines with an eye toward value-based care, such as cardiology and orthopedics, will accelerate.
• Companies that help incumbent brick-and-mortar health systems compete with the disruptive innovators on value and customer experience will present opportunities.
• Labor shortages could persist, so organizations that invest in a better work environment and technologies that streamline workflows will be more resilient.
• Growth of disruptive home-based care models, such as hospital at home, will accelerate, creating opportunities to invest directly in these models as well as the technologies and services that support them.

Healthcare payers

• As payers evolve into diversified health services companies, technologies that help them streamline or automate core payer functions will attract investor interest.
• Companies that help payers deliver a differentiated member experience and better health outcomes through improved member engagement will attract more attention.
• Beyond Medicare Advantage, value-based Medicaid and commercial models will attract increasing investment as value-based care takes off in the Medicaid and employer-sponsored insurance markets.
• Specialty-specific benefit management solutions—especially in high-cost categories such as dialysis—will see a surge in investor interest, but will require thoughtful strategic planning to optimize value creation.
• Firms that help payers and risk-bearing providers address the social determinants of health will thrive.

Biopharma

• Tools that use AI and multiomics data to accelerate drug discovery and development will grow rapidly.
• Pharma services platforms across research and commercialization will continue to attract activity.
• Derivative plays in specialty pharmaceuticals, including specialty pharmacies and disruptive pharmacy benefit managers, will entice investors.
• As investors gain confidence in their scientific judgment, directly investing in assets with pipeline risk may present unique opportunities for high returns.
• Cutting-edge therapeutic modalities, especially cell and gene therapies and mRNA, will grow and create openings for deals.

Medtech

• Equipment management, maintenance, and repair specialists will become more valuable as cost pressures further weigh on providers’ income statements, reinforcing the value of extending equipment life.
• As demand rises for technologies that deliver better outcomes, specialty contract development and manufacturing companies and firms in preclinical, commercialization, and regulatory support will all warrant investor interest.
• Particularly in medtech carve-outs, there will be opportunities to replicate proven playbooks for reigniting growth through commercial excellence and M&A.

Life sciences tools and diagnostics

• Diagnostics providers will continue to expand as hospitals and other care facilities increasingly outsource testing services and as direct-to-consumer testing ramps up.
• New technologies that miniaturize, automate, and digitally integrate lab workflows will attract growing investor interest.
• Enthusiasm for “pick-and-shovel” businesses that support the next wave of innovation will continue.

Healthcare IT

• Digital health tools that prove superior clinical outcomes, target more diverse patient populations, and integrate with in-person care will thrive.
• Platforms that enable customer-centric digital front-door care models, including digital triage, telemedicine, and digital payments, will attract growing attention.
• As fintech companies expand in healthcare, solutions that simplify and unify payments as well as take fraud, waste, and abuse out of the system will draw increasing focus.
• Investors should track the unique technology needs of combined provider and payer entities in the US—payers with provider networks, providers with insurance plans, and providers operating under capitated payments.

Discontinuity opens doors for innovators and incumbents alike, and for societies committed to health equity in the wake of immense suffering. The next few years are bound to bring substantial changes to an industry used to moving at a glacial pace. Healthcare investors who create value—in both health improvements and the financial returns that follow—will be the champions who stand out in the years to come.