A frozen capital market and an insurance premium shock: 10 health care predictions for 2023 from top investors

Welcome back to predictions season. We are pleased to share what we see in our still murky, and materially more dinged-up, crystal ball for 2023. But first, let’s look back and see how we did with our 2022 predictions.

In 2022, we scored 7 out of 10, approaching our previous high-water mark of 8 out of 10 in 2021. We also want to note that one of our evergreen predictions–namely, nothing would happen on drug prices–was an epic fail after the passage of the Inflation Reduction Act. 

Additionally, we did not predict that we would all wake up to 1970s-style inflation and a Fed hiking cycle. This caused a sudden end to…well, just about everything: growth financings, IPOs, and frothy mergers and acquisitions (M&A). 

What we thought could have been a very successful 2022 IPO class will have to wait until the markets improve. We predicted M&A to double in volume and value. While deals did exceed 2021 numbers by volume, value is lagging since many of these deals are being done in distress. 

We expected the Centers for Medicare & Medicaid Services (CMS) to make moves to modify risk adjustment in Medicare Advantage (MA)–but nothing happened.  

However, we were correct about a bunch of predictions. COVID-19 deaths plummeted and long COVID became more feared than acute infection. On the legal side, the Supreme Court did overturn Roe v. Wade, and Elizabeth Holmes is going to jail. 

Karen Lynch, the CEO of CVS-Aetna, might have read our prediction that payors would be racing to get into primary care. On Aug. 2, Lynch said, “(CVS) can’t be in the primary care without M&A,” and that “we are very encouraged and confident that we’ll take the next step on this journey by the end of this year.” Lastly, the controversial Alzheimer’s drug Aduhelm launched with a whimper, and genetic sequencing company Illumina is facing real competition (see prediction #9).  

Now on to 2023. Here is what we think is going to happen:

1. Private growth capital markets remain chilly

While the private capital markets will eventually recover, terms (price, bells, and whistles) will be painful compared to prior years’ largesse. CEOs will have good reason to celebrate if they can achieve any growth round with clean terms and at least flat pricing. 

2. Fed will raise rates to 5.5% or higher

We predict that the Fed is going to avoid undershooting on interest rates and opt for what they think will be a shorter recession now, as opposed to the risk of protracted stagflation later. This makes us more bearish than most bankers who are now forecasting peaks of 5-5.25% after recently predicting lower peak interest rates.  

3. Commercial insurance premium inflation shock

While we believe that the Fed will succeed at controlling inflation for the overall economy, commercial health insurance premiums will be an inflation outlier. Since health care, as a market, tends to be less responsive to the macro economy, hospitals will succeed at raising their rates by five to 15% annually for commercial insurance companies. Insurers will pass this extra cost along to employers in the form of premium increases in excess of 10%. This will test the limits of what employers will accept.

4. Individual Coverage Health Reimbursement Arrangements (ICHRAs) take off

In response to premium shocks, 2023 will finally be the year a meaningful number of small groups drop coverage and push people to exchanges. ICHRAs is a policy enacted in 2020 that allows small employers to give their workers pre-tax contributions that can be used to buy insurance as individuals. These individuals may also qualify for tax subsidies, which may make it a more attractive option than high-deductible employer plans for lower-wage workers.  

5. Nothing changes on risk adjustment in Medicare Advantage

Despite our 2022 prediction that Medicare would make changes to risk adjustment, we are now firmly in the “nothing is going to happen” camp. We think a good case can be made that risk adjustment is working well for getting sicker patients better access to health care and incentivizing innovation and investment to benefit them. Additionally, we think that a Republican House is going to quash any and all progressive concerns about profiteering in Medicare. 

6. The new generation of weight loss drugs spawns the next Cerebral

Cerebral is infamous for basically prescribing ADHD drugs to anyone, with disastrous consequences. We believe that a similar lack of oversight, as well as a conflicting set of incentives and weak ethical boundaries, will create a similar dynamic amongst the direct-to-consumer weight loss companies as more people become aware of the new effective weight loss drugs.  

7. Health tech M&As set an (infamous) record for most deals

For 2022, we predicted a doubling in deal count and value for health tech M&A. In 2023, we are only predicting more deals than in 2022, even though 2022 was a record year in terms of the total number of M&A deals completed. 2023 will break that record–but many of these deals will continue to be distressed as cash-burning companies fail to raise more equity. Acquirers, both large public companies and private companies that have strong growth and margins, will look back in several years and see a lot of value created through their 2022-2023 acquisitions.

8. Congress ratifies telemedicine–and gridlock ensues

The only health policy that Congress could enact in 2023 will permit telemedicine in government programs. We believe that the evidence is overwhelming that telemedicine is clinically useful, appreciated by patients, and enables innovative clinical models. We cannot imagine taking virtual care away from seniors–and we also think virtual care will be critical for improving access to specialty care in less urban areas and high labor cost markets. And then nothing else will get done.

9. No holy Grail for Illumina  

Given regulatory pushback, by the end of 2023, Illumina will have disposed of Grail. More importantly, the acquisition and divestment will have been a financial disaster. Illumina will lose more than all that they paid for it (when accounting for residual value less purchase price, legal costs, capitalization of the spin-off, burn rate, etc.). In other words, even if they got Grail for free, they would still have lost money.

10. Transgender treatment becomes the new abortion 

With Dodd’s decision providing a roadmap for delegating power to the states to regulate abortion services, we think conservative states will take a similar approach to ban transgender reassignment procedures. Currently, four states have passed restrictive laws. We predict that 10 or more states will follow in 2023 and that opponents will tee up another Supreme Court showdown.

Even in the face of real efforts by both Amazon and Apple, we are doubling down on our 2022 evergreen prediction that “Big Tech will continue to be terrible at health care.” We see no evidence that Amazon Care, One Medical’s services, or Apple’s hardware will change the outcomes or cost curves significantly and are as bearish as ever about the prospects of Google, Microsoft, Salesforce, and new entrant Oracle succeeding in health care. 

Regional Blue Cross/Blue Shield plans should, but will never, merge to better compete. This prediction is new and evergreen because it is both completely obvious in a “scale trumps all” industry and nearly impossible to materialize. Non-profit status plus “leadership considerations”, giant balance sheets, local boards, cartel-like Blues governance, and state regulators looking to extract concessions mean this strategy will only emerge after it is too late.

We look forward to reporting back to you in a year. If you agree, disagree, or have thoughts please reach out on Twitter at @bobkocher and @brobertsvc.  In the meantime, we wish you a safe and happy holiday season and 2023.

Bob Kocher and Bryan Roberts are partners at the venture capital firm Venrock, where they invest in health care businesses.

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.

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