journalfront

Public Service

What the Future Holds for the Thriving Wellness Market

2024-11-20

Health is indeed wealth, not only for individuals but also for organizations in the wellness space. The global consumer wellness market has reached a staggering $1.8 trillion per year, with the US market growing at a rate of 10 percent annually and now worth $480 billion. An astonishing 82 percent of US consumers consider wellness a top or important priority in their daily lives, similar figures being seen in China and the UK. McKinsey partner Anna Pione emphasizes, "We knew consumers were increasingly treating wellness as a priority. What continues to surprise us every year is just how much of a priority it is."

Get to Know Senior McKinsey Experts on Wellness Business

Anna Pione is a partner in McKinsey's New York office, with Warren Teichner as a senior partner, Eric Falardeau in the Montreal office, Martin Lösch in the Stuttgart office, and Shaun Callaghan in the New Jersey office.

Defining Wellness

McKinsey defines wellness along six dimensions: better health, fitness, sleep, mindfulness, appearance, and nutrition. In this explainer, we'll explore what people care about regarding their health and the future changes in this space.

Health is more than just the absence of disease. It encompasses various aspects that contribute to overall well-being. Wellness is not just a trend but a fundamental aspect of our lives.

Understanding these dimensions helps us better understand how to prioritize and improve our health.

Top Trends in Consumer Health and Wellness

In a world where health is prioritized, consumers are focusing on data-backed products and services. The COVID-19 pandemic led to the popularity of at-home testing kits, and now consumers are interested in other at-home kits for various health checks.

About half of surveyed consumers have purchased fitness wearables, with watches being the most common. Other technologies like wearable biometric rings and continuous glucose monitors are also gaining popularity. More than three-quarters of respondents are open to using wearable devices in the future.

People love personalization; nearly one in five US consumers and one in three US millennials prefer personalized products and services. Generative AI can enhance personalization by designing customized workouts based on fitness data.

Users are moving away from "clean" products towards those with clinically proven ingredients. In the US, this trend is prominent in over-the-counter medications, vitamins, and supplements.

Doctor recommendations hold significant value as consumers become more cautious about health opinions. They trust doctors' recommendations for mindfulness, sleep, and overall health.

Biggest Areas of Growth in Wellness Industry

Women's health has seen significant growth, with more products available and purchases on the rise. Menopause and pregnancy-related products have the highest spending, but there are still unmet needs.

Healthy aging is a growing trend, driven by preventative medicine, health technology, and anti-aging research. Around 70 percent of consumers in the UK, US, and China purchased more in the healthy-aging category.

Weight management is a concern for nearly one in three US adults. GLP-1 drugs are becoming popular, especially in the US.

In-person fitness is becoming a core part of people's identities, especially among Gen Z. Consumers are expected to increase spending on fitness club memberships, apps, classes, and personal training.

Gut health is important to over 80 percent of consumers in three countries. Chinese and US consumers prefer probiotic supplements, while UK consumers choose probiotic foods.

Sexual health has seen growing demand due to increased conversations and support. Eighty-seven percent of US consumers spent the same or more on sexual-health products.

Sleep is the second-highest health priority, and there's a need for holistic solutions. Sleep tech is a growing industry with opportunities for companies to use consumer data.

What Matters Most to Older Adults

A 2023 McKinsey Health Institute survey of over 21,000 people aged 55 and older in 21 countries found some commonalities. Respondents emphasized the importance of having purpose, managing stress, having meaningful connections, and preserving independence.

Perceived health declines with age in every dimension, with mental health being the most positively rated for 55-64-year-olds and spiritual health for those 65 and older.

Money matters for older adults' well-being. Financially stable older adults are more likely to adhere to healthy habits. However, high-income economy respondents don't necessarily thrive more than those in lower-income economies.

Participation in activities like working, volunteering, or attending classes leads to better overall health and lower healthcare costs.

The upstream sector of the oil and gas industry, like many others, is grappling with a multitude of challenges. Volatile commodity markets lead to higher cost inflation, geopolitical instability causes supply chain disruptions, and there's intense competition for construction talent and labor in certain regions like North America. All these factors are putting pressure on bringing new production online. As a result, capital expenditure is on the rise, demanding cost optimization and innovation in capital deployment processes. Traditional procurement models often fall short in responding to these growing pressures, potentially affecting project delivery. In this article, we'll explore how innovative procurement strategies and the should-cost methodology can help overcome these inefficiencies.

Unlock Efficiency in Upstream Oil and Gas Procurement with Should-Cost

Challenges Facing the Upstream Oil and Gas Sector

The industry's capital deployment approach is under scrutiny as it faces a range of challenges. Rising costs are causing a shift away from traditional lump sum approaches. Fluctuations in raw material prices make it difficult to rely on benchmarks for cost estimation. Additionally, the recent shift towards supplier risk-sharing agreements in procurement models presents a key challenge. For example, the cost of shipbuilding grade steel in 2023 increased by more than 55 percent compared to 2022. These challenges are driving the need for more innovative procurement solutions.

The rapidly evolving landscape with new challenges, such as faster time-to-market demands and supplier scarcity in certain geographies, requires the industry to find ways to streamline procurement. Single-sourcing procurement approaches are emerging as a potential solution. The "technical and commercial partnership" approach is gaining popularity as it is better equipped to handle the increasing complexities in capital equipment costing.

Evolving Procurement Approaches and New Capabilities

To leverage new procurement approaches, many upstream companies need to enhance their capabilities. This includes developing an independent perspective on the fair cost of a project to negotiate successfully with suppliers. Should-cost methodology can play a crucial role here by strengthening the shift from a lump sum approach to the technical and commercial partnership approach. It can also help identify multiple optimization levers and shorten overall timelines for final investment decisions.

For instance, a floating LNG owner carved out some hull sections and topside modules from the lump sum agreement and bid them out independently, achieving cost optimizations. In the midstream sector, companies are moving to convertible contracts with separate FEED to maintain direct-buy flexibility. In the offshore industry, some players are taking in suppliers as equity partners to reduce risk margins. And some oil and gas players are developing strategic partnerships with contractors to ensure technical standardization and unlock cross-project procurement synergies.

How Should-Cost Methodology Works

Should-cost methodology is emerging as a reliable solution to help upstream players address their current challenges. It provides granular cost transparency by breaking down the total cost of a project into components and assessing the cost drivers. Compared to traditional solutions, it can estimate costs for any combination of design, geographic footprint, and commercial agreement.

Initially developed in the automotive sector, the should-cost methodology uses a four-step approach. First, it analyzes the design choices and drawings to derive a bill of quantities. Then, it maps the value chain to identify manufacturing steps. Next, it costs the required quantities and value chains to calculate direct costs. Finally, it completes the bottom-up should-cost calculations to define components. Through this flexible and fact-based methodology, it provides end-to-end transparency on the supply chain cost structure.

For example, in a deep dive should-cost analysis for LNG tanks, full transparency on key cost drivers was provided, leading to an 8 percent cost reduction in the final negotiated price.

Should-Cost Applications in the Upstream Market

The should-cost methodology is flexible and can be deployed at multiple phases of a project, from concept design to FID and commissioning. It has benefits across multiple applications, such as enabling more effective negotiations between suppliers and operators, facilitating faster and more factual decision-making, and increasing overall profitability.

Specific instances where these benefits can be realized include first-of-a-kind projects, where it provides a solution for in-house benchmarking. It also supports fact-based discussions with stakeholders and helps assess a supplier's learning curve. It can quantify price evolutions in volatile markets and assess local constraint implications. It can also be used for trade-off analysis and contract strategy definition. And it can support claim management and price renegotiations.

Building Dedicated Capabilities for Should-Cost

While should-cost application offers significant benefits, oil and gas players need to build dedicated capabilities within the organization. There are three typical models - buy, hybrid, and make. The buy solution involves externalizing should-cost modeling for all purchase categories. The hybrid solution externalizes only high-complexity or first-acquisition categories, while keeping the rest in-house. The make solution involves internalizing should-cost modeling for all categories.

We believe the hybrid solution is the best fit for the oil and gas context, where an operator can develop internal capabilities for standard items while outsourcing higher complexity ones.

In conclusion, global volatility and changing business models have created new challenges in the upstream supply chain. By adopting should-cost methodologies, organizations can enhance operational efficiency, optimize cost structures, and drive sustainable value creation.

The healthcare industry has faced a series of challenges in recent years, with 2022 being a tough year for provider organizations while payers initially remained sheltered. However, conditions have worsened for payers in 2023 and continue into this year, with limited relief on the horizon. In contrast, the pharmacy services sector has shown more nuanced trends, with some organizations benefiting from pharmaceutical innovation and new delivery models while others struggle with increased regulatory scrutiny.

Unraveling the Complexities of the Healthcare Industry

Healthcare Industry Challenges and Trends

The healthcare industry has been buffeted by a growing number of challenges over the past few years. Supply cost inflation and workforce shortages have weighed on provider performance, with aggregate annual EBITDA growth from 2019 to 2024 estimated to be around 2 percent, well below the 6 percent growth in national health expenditures. Many providers have taken steps to boost their operating performance, and some have been helped by CARES Act funding and Medicaid expansion. Provider performance has already recovered in some states, and we anticipate that it could recover by the end of this year. Through 2028, mid-single-digit EBITDA growth for providers is expected, in line with overall NHE increases.Despite evidence that cost increases are abating, a focus on performance improvement remains critical. Median unrestricted days' cash on hand for large not-for-profit health systems declined in 2023 compared to 2019. Many provider organizations have relied on investment income to offset operating losses, but this may not be sustainable if returns fall. Organizations not targeting productivity improvements in core operating functions each year are likely falling behind.Leading provider organizations must pursue next-generation transformation enabled by emerging technologies like generative AI to support performance improvement across various applications. By one estimate, AI adoption within the next five years could result in net savings of 5 to 10 percent of healthcare spending. Providers need to discern their existing technology capabilities and data governance requirements to determine which use cases are best positioned to take advantage of gen AI.Digital tools should build on established solutions to enhance operations and improve patient and physician experiences. For example, new technologies like AI can predict patient volume and create more flexible schedules. It can also ease the administrative burden, with estimated annual net savings of $24 billion to $48 billion for hospitals and $10 billion to $30 billion for physician groups in the next five years.As operating performance stabilizes, providers can explore new strategies in high-growth areas. Ambulatory surgery centers and home health are two such areas with projected 7 percent annual revenue growth through 2028. Care delivery is expected to structurally change as economic pressure and patient preferences shift. These shifts could lead to a reduction of $114 billion to $148 billion in overall healthcare spending annually.

Payers' Struggles and Opportunities

For payers, challenges intensified in 2023 and continued in 2024. Many payers have focused on margin recovery and overcoming challenges based on earnings calls. Some plans have been performing below breakeven profitability, and headwinds include accelerating utilization, inflationary pressure, end of pandemic health emergency measures, changes in risk adjustment regulation, and a tightening of government reimbursement.In government lines of business, MA plans face revenue and cost challenges from new guidelines and changes to the Star Rating methodology. Utilization rates remain high, and these factors could create revenue and cost pressures. In Managed Medicaid, enrollment declined after eligibility redetermination, but there are growth opportunities in states transitioning to managed care and potential Medicaid expansion.In the commercial market, payers are expected to increase premiums, but employers are unlikely to absorb all costs. Small and medium-size businesses are seeking more budget-friendly alternatives, and the self-insured sector is expected to grow. As a result, employers may reduce plan options and shift to defined-contribution plans. Payers can offer nontraditional plan types like individual coverage health reimbursement arrangements (ICHRAs), which are already experiencing double-digit growth.

Pharmacy Sector Dynamics

While some pharmacy service organizations have faced obstacles, others have benefited from favorable conditions. Retail pharmacies face margin compression due to inflation, labor shortages, and rising real estate costs. Pharmacy benefit managers have faced calls for greater transparency, and the high cost of broad-population drugs like GLP-1s is creating tension.However, the biosimilars pipeline is robust, and launches have gained more market traction. Innovative models like direct-to-consumer delivery and integrated medical and pharmacy care delivery are starting to gain traction. Specialty pharmacies are on the rise, with an 8 percent CAGR in specialty drug spending expected between 2023 and 2028. Within specialty drugs, approvals of cell and gene therapies are expanding, and while the cost remains high, spending per patient could decrease as indications expand.The value chain for pharmacy services may evolve, with many organizations investing in more integrated care delivery models. A recent study found that medically complex Medicare Advantage members in a pharmacy care management program had lower cost of care per member per month.

Healthcare Services and Technology Sector Growth

Unlike other healthcare sectors, healthcare services and technology has grown steadily to meet the rising demand for new data, analytics, and software. Revenue and EBITDA in the sector have experienced a CAGR of about 9 percent since 2019, and similar growth rates are expected through 2028.The HST landscape is highly fragmented, with the top ten companies accounting for approximately a quarter of the sector's revenue and the next 100 companies contributing an additional 15 to 18 percent. Limited interoperability between data sources and systems, regulatory complexity, and a diverse customer base contribute to this fragmentation.Many value creation opportunities accompany the growing demand for more advanced technologies. Technology advances may help vendors lower customer acquisition costs and build deep vertical expertise. There is also a need for technology integration to create a more seamless user experience and address cybersecurity risks.The challenges in the healthcare industry are far from over, but they also offer an opportunity to reimagine the future of care and create sustainable improvement for healthcare organizations, patients, and communities.