Insights

The healthcare industry is experiencing a significant shift as we move into 2025, with both challenges and opportunities shaping the landscape. While 2024 delivered a mix of obstacles and advancements to the healthcare M&A environment, TripleTree is proud to have helped shape some of the biggest strategic and private equity-led transactions of the year. 

The past year has seen the industry largely adapt to post-pandemic realities, with a more stable interest rate environment, which has helped restore confidence in financial planning and valuations. We've also witnessed the sector's resilience in the face of regulatory changes, particularly in government-sponsored healthcare programs. While challenges remain, there's a growing sense of optimism surrounding investment and acquisition opportunities across multiple sectors.

However, 2024 was not without its controversies and setbacks, ranging from very public tensions around the state of healthcare, to front page criticisms on Medicare Advantage health plan strategies to pricing and risk adjustment, to congressional hearings and a draft FTC report on pharmacy benefit management (PBM) pricing models. These challenges were punctuated by very public backlash, underscoring the deep-seated challenges throughout the industry.  

These events serve as reminders of the complex challenges we face as the industry works to balance rapidly accelerating healthcare costs with the desire to ensure the healthcare system prioritizes and balances the human impact on care outcomes and consumer experiences. It is crucial to recognize that these complex issues cannot be resolved through proverbial finger-pointing between parties and public vilification of specific sectors of the industry. 

The solution lies in creating an environment that facilitates and promotes innovation and minimizes conflict between payers, providers, and patients. We must look for ways to contain ever-increasing healthcare costs, while seeking to enhance patient outcomes. This balance can be achieved through collaborative efforts between stakeholders, a renewed focus on creativity, and the willingness to bring about change. 

As we look ahead to 2025, here are a few key sectors where we expect to see outsized attention, investment, and potential further industry consolidation:

1. Managed Care Opportunities: We anticipate significant tailwinds in the managed care sector, driven by positive momentum in commercial insurance markets. As the industry moves past some of the headwinds experienced in 2024, we expect to see measured approaches to better manage risk, coupled with investments in technologies and services that will not only improve administrative costs but also reduce dislocation in the healthcare ecosystem.
2. Pharmacy Benefit Management (PBM) Innovation: The continued escalation of healthcare spend on drugs, particularly specialty medications, has amplified the need for new strategies in PBM pricing and services. We foresee advancements in this space that will help manage these rising costs more effectively while improving patient access and outcomes.
3. Provider Reimbursement and Administrative Efficiencies: The Revenue Cycle Management (RCM) sector continues to drive transformation, with strong industry support to leverage AI, advanced analytics, and scale to deliver more efficiency in a complex, costly process. We anticipate substantial industry-wide consolidation and major investments in technologies and technology-enabled processes that streamline administrative activities, reduce errors, and improve overall financial performance for healthcare providers.
4. Behavioral Health Integration: In line with the current emphasis on the holistic approach to the patient’s health, there is a growing emphasis on integrating behavioral health care with broader healthcare services. This trend is aligned with the industry’s goals of improving whole person health, increasing focus on behavioral health.  Additionally, a focus on improving the underlying care delivery dynamics will attract additional investor interest to the sector.

Managed Care Opportunities: Navigating Challenges and Embracing Innovation

We've seen managed care organizations navigate challenges in recent years including significant regulatory changes, inflationary pressures, escalating drug costs, network friction, and falling member satisfaction rates. Medicare Advantage (MA) plans have grappled with the impact of CMS’s HCC V28 coding changes, increased healthcare spending, and Star rating issues. The addition of new out of pocket pharmacy spend caps introduced under the Inflation Reduction Act has prompted a reevaluation of benefit designs and cost containment strategies across MA plans. Meanwhile, Medicaid programs have been disrupted by the redetermination process, altering risk pools and delayed reimbursement relief in the face of rising medical costs. The commercial sector, too, has faced its share of obstacles such as contending with inflationary pressures and an accelerated increase in pharmaceutical spending, especially considering the rise of specialty drugs. Across all the payer segments, there is an environment of increased conflict with providers regarding prior authorization processes and pushback on inpatient admission management. 

Despite these headwinds, as managed care organizations worked through the fourth quarter, there were indications of business stabilization and growing confidence in their ability to navigate these challenges strategically. 

As we move into 2025, we anticipate several key areas of focus and innovation:

1. Regulatory Environment: The incoming administration may usher in a more favorable regulatory landscape for managed care organizations.
2. Commercial Plan Innovation: We're seeing newer developments in commercial plan design. No-deductible plans and approaches that reduce consumer dissatisfaction are gaining traction to encourage members to utilize more cost effective, narrower networks.
3. Technological Advancements: Investments in electronic prior authorization (ePA) are set to improve experiences for both providers and members. We expect to see continued investment in digital member navigation tools as well.
4. Whole Person Care: Our discussions with plans reveal that there’s an increased focus on behavioral health conditions and treatment approaches reflecting a broader industry shift towards addressing whole person care.
5. Diversification of Revenue Streams: Larger plans are likely to continue investing in risk-bearing care delivery organizations, serving not only their own membership but also supporting other health plans.

As we think about the future of managed care, it's clear that organizations capable of adapting to these challenges while capitalizing on emerging opportunities will be well-positioned for success. We anticipate that managed care organizations will continue to play a crucial role in shaping the healthcare landscape. Their ability to innovate plan design, leverage technology, and focus on holistic care approaches will be key drivers of growth and improvement in patient outcomes.

PBMs in the Spotlight

As we look ahead to 2025, the pharmacy benefit management (PBM) industry finds itself at a critical juncture, facing unprecedented scrutiny and challenges. The past year has seen PBMs navigate a complex web of public opinion, regulatory pressures, and market dynamics. The opaque nature of prescription drug pricing negotiations has made PBMs an easy target for critics seeking to assign blame for rising healthcare costs. We've witnessed increased attention from both regulators and lawmakers, with the FTC's critical draft report released mid-2024 and bipartisan support for PBM reform gaining traction in Congress.

It is important to note that any legislation, while well-intentioned, may not necessarily deliver the desired results. Many legislative actions have historically led to unintended consequences. As an example, we could potentially see more limited patient access to needed medications, further imbalance and price disparity in the independent pharmacy channel, or additional administrative costs to deal with potential new regulations. These possible outcomes underscore the complexity of the PBM landscape and the need for carefully considered, holistic approaches to reform that balance transparency, cost management, and patient care. Regardless of how the ongoing regulatory discussions land, one thing is clear: pharmacy spend is a large and rapidly growing source of cost for payers, employers, and patients, and each of these constituents will continue to search for innovative ways to manage spend and create a better experience.

As we think about the coming year, we're focusing on several key themes that are transforming the PBM landscape:

1. We anticipate that ‘transparency’, whether it be through pricing models or client reporting, will continue to be a focus as PBMs respond to regulatory pressures and market demands
2. A focus on the clinical side of pharmacy management, mirroring more traditional medical management-like approaches that leverage pharmacist knowledge and clinical expertise to focus on the patient instead of the formulary, and demonstrate ROI and improved outcomes
3. Investments in data analytics and AI are set to significantly advance medication management and decision support systems with a goal of better incorporating the rest of the ecosystem (i.e., prescribers) into the conversation
4. More agile, tech-forward, and innovative PBMs have an opportunity to distinguish themselves from the big four by offering higher-value services

Our view is that the industry's future lies not in questioning the necessity of PBMs, but in how they can evolve to better serve their clients. 

As the industry faces the accelerating challenges of rapidly escalating drug costs, it's clear that adaptation and innovation will be crucial for PBMs. Those benefit managers that can demonstrate clear value, embrace transparency, and leverage technology to improve patient outcomes are what this industry would benefit most from. We would hope that any legislative actions would be inclusive of all constituent viewpoints and result in benefits to the consumer and the broader industry.

Providers Will Continue to Benefit from Technology Investments in 2025, Especially in RCM Automation and Outsourced Technology-Enabled Processes

As we navigate the evolving healthcare landscape in 2025, provider organizations are increasingly turning to technology investments and/or support from scaled, technology-enabled partners to address longstanding reimbursement and margin challenges. One area that stands out for its potential to drive significant improvements to hospital operations and cash collections is the Revenue Cycle Management (RCM) value chain.

The mounting demand for innovative RCM solutions is driven by several factors, including the need to reduce administrative costs, improve cash flow, and enhance overall operational efficiency. As healthcare providers continue to face financial pressures and regulatory complexities, provider demands for advances in the RCM process to support operational efficiency will continue to accelerate.

While some form of human intervention will always be a part of RCM, the industry continues to “get smart” around artificial intelligence and apply the technology to a range of various RCM processes, unlocking massive potential for newfound efficiencies in the front, middle, and back-office areas of the RCM continuum. Notably, this shift is purportedly improving accuracy by automating manual processes throughout the claims lifecycle, proactively identifying causes of denials or clinical documentation errors, optimizing patient payments and satisfaction, and reducing animosity across providers and payers.  

Artificial intelligence will likely be transformative, even disruptive in certain areas, but will most likely be applied alongside those with access to massive troves of applicable data and deep (human or institutional) expertise and knowledge around key RCM processes. AI will continue to be a "hot button" topic for investors and RCM companies alike as the healthcare landscape continues to evolve, advance, and gain comfort with its broader use. Regardless, there will be a distinct opportunity for companies to lean into the application and integration of AI and become part of the cutting edge in this new chapter of technology enhanced RCM.

Broadly speaking, the healthcare industry is looking forward to AI-driven improvements to the RCM process. According to a Healthcare Financial Management Association (HFMA) Pulse Survey, about 46% of hospitals and health systems now use AI in their RCM operations. A survey conducted by Inovalon found that 84% of hospital executives expressed optimism regarding AI-enabled RCM in hospitals. We expect to see AI adoption accelerate in 2025, especially with the potential to drive efficiency in provider operations across the RCM cycle. 

Taking a traditional view of the RCM cycle (front, middle, and back-office functions), our recent transaction work and deep familiarity of innovative companies across the RCM landscape suggests that AI, if implemented in the right way, has the potential to improve several aspects of the RCM cycle.

On the front end, AI and machine learning can have select impact in key processes including:

• Patient Scheduling and Registration: AI-powered “smart scheduling” capabilities and agents can efficiently facilitate patient data collection, and verification to optimize the patient intake process based on type of service, personal preferences, and availability. Downstream patient engagement pertaining to communications and billing processes can be automated as well.
• Eligibility Verification and Program Assistance / Enrollment: Machine learning algorithms can efficiently review patient information, benefit plans, and socioeconomic factors to reduce errors and denials as well as identify coverage and enroll patients in eligible programs.
• Prior Authorization: AI is automating the submission and tracking of prior authorization requests and when needed, can pull relevant clinical documentation, potentially reducing delays in care and alleviating payer/provider friction.

Where we see even greater potential for AI’s impact is in the middle cycle, with AI investments improving key processes such as:

• Clinical Documentation Improvement (CDI): AI can identify documentation gaps and suggest improvements in real-time, enhancing documentation accuracy which directly impacts reimbursement and compliance.
• Charge Capture: AI can analyze clinical documentation and charges to help ensure all billable services are captured accurately.
• Coding: Natural language processing and machine learning – alongside the requisite clinical and billing rules – can significantly improve coding accuracy and efficiency, streamlining the process and reducing the need for manual intervention.

We are also seeing successful strategies to leverage AI and machine learning throughout the back-office RCM area to improve:

• Denial Management: Machine learning algorithms can predict and prevent denials by identifying patterns in historical data, helping to validate that all necessary documentation is submitted as part of the claim and alerting coding staff of any required edits.
• Accounts Receivable (AR): AI can prioritize and automate follow-ups, improving collection rates and reducing days in AR.
• Payment Posting: Automation of the payment reconciliation and posting process, reducing manual data entry, errors, and improving overall efficiency.

While AI offers a potentially strong value proposition to improve the RCM continuum, healthcare organizations must navigate several hurdles in AI adoption including governance, risk management, compliance, data privacy regulations, security concerns, and the need for integration with existing systems. However, the opportunities for improved efficiency, reduced errors, and enhanced patient experiences have the potential to outweigh these challenges. As a result, TripleTree expects the RCM automation trend to accelerate, with AI-driven solutions becoming increasingly improved to meet the unique challenges of the healthcare industry. 

Behavioral Health Integration: 2025 will bring an acceleration in investments and acquisitions supporting whole person care 

Supported by strong macro fundamentals fueling demand for quality care, the behavioral health market witnessed a surge of capital from private equity funds between 2018 – 2021.  Despite the increasing need for quality behavioral health services following the COVID-19 pandemic, the Great Resignation and subsequent wage inflation created strain on the healthcare services labor market.  As we look towards 2025, there are several factors that point towards a promising outlook, and resurgence, of M&A activity in this sector.  

1. Strong Macro Fundamentals Remain:  The importance of behavioral healthcare has gained increasing attention throughout the last decade, as the interplay between mental and physical health has become widely adopted.  Supported by the efforts of the clinical community and countless advocacy groups, individuals are more attuned to the importance of mental health, viewing it as crucial to their physical well-being.  Additionally, governmental regulatory bodies continue to reshape policies and laws to improve parity, with more inclusionary language in the latest final rule to the Mental Health Parity and Addiction Equity Act (MHPAEA).  With all stakeholders aligned and accepting of whole-person health, demand for quality behavioral health has increased dramatically in a very fragmented market.  Further, the total funds available from the various opioid settlements is approximately $54 billion to be allocated to states and communities across the country through 2038 - of which, 85% is required to be spent on opioid remediation, including harm reduction, treatment options, counseling, family support and workforce training.
2. Improvements (Maturation) of Behavioral Health Operations:  In recent years, behavioral health companies (and healthcare providers more broadly) have been operating in one of the most challenging environments in modern history.  Those challenges only pushed operators to further refine their operating models, adopting new processes and technologies to more efficiently deliver care to patients in need.  Tools have been implemented to better enhance the utilization of the workforce, without putting additional strain on the providers themselves.  This is in response to the advancement of new technologies (including AI’s impact on mid and back-office functions, discussed above) that are being adopted to create more seamless administrative workflows.  It’s no surprise that many of these investments have been made within Human Resources functions, to bolster and streamline recruiting, onboarding, training, and the ongoing development of the labor pool.   
3. Stabilizing Labor Environment:  From a macro perspective, the labor environment continues to rebound and further stabilize.  While wage inflation continues to creep down from the 2022 high-water mark, today’s market provides much more stability and predictability than prior years.  Looking forward, the US Bureau of Labor Statistics (BLS) forecasts the employment of substance abuse, behavioral disorder, and mental health counselors is projected to grow 19% from 2023 to 2033, much faster than the average for all occupations.  Whereas traditional mental health jobs are expected to increase 12%, or 3x that of average occupational growth.  Despite improvements, it’s apparent that demand for behavioral health services will continue to outpace that of the labor pool.  For this reason, new regulatory policies and initiatives are taking shape to solve this imbalance.  For example, California recently amended the California Mental Health Services Act (MHSA), which includes new funding allocations that is specifically aimed at growing the behavioral health workforce in California.  State driven initiatives alike will aid behavioral health workers by providing financial and training support, while also providing support to organizations and educational institutions that look to grow the workforce.  

As we enter 2025, the behavioral health market presents a landscape of opportunities driven by increased awareness, technological advancements, and improved policy-supported labor supply. TripleTree continues to view the autism therapy and broader adolescent market as sectors that should see increased activity in 2025. Explore more TripleTree insights about the autism sector:

• The Growing Adolescent Behavioral Health Market
• Autism Services Sector Earns Investor Attention
• A Health Check on the Autism Sector

Conclusion

TripleTree is looking forward to upcoming conversations among healthcare innovators, industry leaders, and capital allocators next week in San Francisco.  These discussions, along with ongoing collaboration among industry stakeholders, will help shape the direction of healthcare investment and M&A in 2025. 

The insights and partnerships formed through ongoing collaboration will be crucial in advancing a healthcare system that is increasingly patient-centric, technologically advanced, and value-driven. We are encouraged by the growing interest in companies that:

• support an outcomes-focused managed care industry, 
• innovate in the PBM space to offer better value,
• lower costs and provide higher service levels, delivering more efficiency for providers in the RCM process through AI and data driven approaches, and
• integrate behavioral health into holistic care models. 

TripleTree remains optimistic about the positive trends we're observing across the market. Our own transaction momentum coming out of 2024 and the promising pace of activity shaping up this year reinforce our confidence in the sector's resilience and value for those paying for and receiving care. 

Here’s to a New Year supporting a healthcare system that is more efficient, transparent, and truly centered on improving patient outcomes. We look forward to engaging with you on the exciting opportunities ahead!