With dramatic disruption ahead, three steps for health systems to mitigate impact

What’s trending: Medicaid cuts, tariffs, and other policy changes mean leaders need to take a proactive approach 

Much uncertainty surrounds the latest policy developments, from tariffs to proposed Medicaid cuts to research funding. But it’s clear that much disruption is coming. As many hospitals and health systems are already surviving on slim operating margins, significant changes will be necessary to enable long-term sustainability. 

Proactive repositioning requires healthcare leaders to evaluate possible impacts, plan for likely scenarios, and identify new operational strategies.   

Why it matters: 

Despite significant improvement over 2023, nonprofit hospitals and health systems entered 2025 with an average operating margin of just 1.2%—still well below 2019 levels. However, each health system is in a different financial position and will be uniquely affected by upcoming changes. Potential impacts include:   

• Reductions in Medicaid funding: Health systems with a higher Medicaid payer mix face meaningful risk. Proposals have targeted eligibility, federal matching funds, and disproportionate share arrangements. Organizations in states with “trigger laws” related to Medicaid expansion may be most immediately and greatly impacted. Rural hospitals may also take an especially hard hit. .

• 340B drug discounts: Organizations that currently qualify may lose their eligibility status as disproportionate share hospital (DSH) program payments fluctuate. Even if they retain this status, organizations will likely see erosion in reimbursement under this program based on federal policy proposals and continued manufacturer pricing restrictions. 

• Site-neutral payment: This change will dramatically impact most health systems—especially those with greater volumes in hospital outpatient departments (HOPDs).   

• Research funding cuts and proposed changes to graduate medical education (GME) programs: Many academic enterprises are already navigating these changes, which will also create second-order effects for care delivery as organizations weigh investments across clinical, teaching, and research missions. 

Healthcare organizations are facing these new challenges alongside existing pressures like eroding reimbursement, a strained workforce, and renewed concern over non-labor cost inflation. 

What’s next: 

Executives can utilize a scenario-based planning approach with three key actions: 

1. Take stock of relevant federal and state proposals, and develop an informed perspective on the likelihood and degree of changes.   
2. Model or “stress-test” the range of financial and operational impacts specific to their organization.   
3. Identify foundational and emerging strategies, and create contingency plans to stabilize margins and endure.   

For example, a $5 billion multi-hospital regional health system identified exposure to site-neutral payment policies, reduction in Medicaid eligibility and funding, and government and manufacturer-induced erosion to 340B as their primary concerns. The leadership team conducted working sessions to align on the range of disruption introduced by specific policy proposals.  

In considering site-neutral payment, leaders contemplated up to a 10% reduction in outpatient revenues. A sobering, clear-eyed analysis suggested the organization would face up to $500 million in margin pressures. 

To counter the potential policy impacts, organizations like this one must rely on foundational financial performance improvement strategies as well as emerging opportunities. Foundational strategies often yield 5–8% margin improvement in aggregate across enhancements in workforce management, revenue cycle, the physician enterprise, consumer access, supplies and purchased services, and near- to mid-term service line growth.* With the potential disruption ahead, these foundational strategies are necessary but likely insufficient.  

Organizations will need to look to emerging opportunities, such as: 

• Proliferating intelligent automation to increase productivity and efficiency. This is best suited to repetitive, rules-based business processes, including revenue cycle management workflows ranging from insurance verification to charge reconciliation. 

• Adopting artificial intelligence (AI) to alleviate burdens and expand capacity for patient care. Near-term, high-impact use cases for reliable clinical applications include things like generation of discharge summaries from historical patient data. 

• Scaling up care at home programs. Many organizations have initiated these programs, but they remain in early or pilot stages, representing a fraction of the addressable patient population. 

• Seeking partnerships to optimize and de-risk certain assets and services. Opportunities for consideration might include joint ventures on ambulatory surgery centers or affiliations with specialized private entities to operate behavioral health hospitals. 

• Pursuing other interventions that require challenging decisions around service offerings, asset mix or footprint, and strategic direction. “Break-the-glass” decisions will be a part of many health systems’ contingency plans. For instance, 340B erosion may force many health systems to scale back from providing oncology services. Similarly, Medicaid eligibility restrictions and other funding changes may lead to further discontinuations of maternity programs, given that 41% of births nationwide are currently financed by Medicaid.    

In the $5 billion health system example, executives considered these possibilities and determined the following plan for long-term sustainability: 

Despite uncertainty, healthcare organizations can still plan and prepare 

To stay ahead of the disruption from the policy changes ahead, healthcare leaders should understand the specific impacts to their organizations and the communities they serve, preparing now the strategies they may need to deploy for ongoing sustainability and service to their communities. 

*Source: Chartis client experience over prior 3 years.

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