Preparing Health Systems For The Impacts Of Policy Shifts

Uncertainty surrounding healthcare funding is adding to financial and operational challenges facing providers. Nearly 65 % of US hospitals currently have operating margins below 3%, according to our analysis of Medicare cost reports. Policies being debated in Washington, D.C., ranging from Medicaid funding to tariffs, will have additional implications for the sector’s financial stability, to the point of eliminating some health system’s margins entirely.

A combination of various federal proposals could result in up to 300-basis-point adverse margin impact on health systems if no mitigating action is taken, based on a preliminary analysis by Oliver Wyman. The projections were modeled on a typical mid-sized health system with $5 billion in annual patient service revenue. Contributing factors include changes in payer mix, rising supply chain and pharmaceutical costs due to tariffs, and reductions in federal research funding.

Key policy changes impacting health system finances

• Medicaid funding reductions and growth of uncompensated care: While exact reductions are uncertain, a budget blueprint passed by the House instructs the Energy and Commerce Committee, which oversees Medicare and Medicaid, to find $880 billion in savings over 10 years. If, as reported, these savings will reduce federal spending on Medicaid, there could be a shift in payer mix towards uninsured populations. Safety-net and children's hospitals will be impacted the most.
• Lower Affordable Care Act (ACA) enrollment and shift of patient mix to Medicaid or uninsured: The Trump administration reduced ACA navigator funding by 90%. A similar funding reduction during the first Trump administration was associated with a 6.3% reduction in ACA enrollment between 2017-2019. The administration also proposed shortening the ACA enrollment period by one month and tightening requirements around eligibility for subsidies and special enrollment periods.
• Tariffs on medical supplies and pharmaceuticals and rapid expenses increase: Tariffs on imports from Canada, China, and Mexico could significantly raise the costs of medical supplies and pharmaceuticals. The US imported more than $176 billion in drugs and related products in 2023, meaning these tariffs could drive up hospital procurement expenses.
• Research funding cuts: The National Institutes of Health in February instituted a 15% cap on reimbursement for indirect costs at research institutions, generating $4 billion in savings for the federal government. The funding covers such things as facility and administrative expenses. Historically, the average indirect cost rate hovered around 28%. A federal judge has temporarily blocked the cuts from taking hold.

Other regulatory changes could further impact healthcare systems. Stricter enforcement of price transparency requirements, for instance, could increase compliance costs for hospitals and insurers. Immigration restrictions for the healthcare workforce may exacerbate staffing shortages, particularly in rural areas.

Strategic actions for healthcare executives

Previous Oliver Wyman Health articles have detailed how health systems can undertake a cost transformation process. Taking those steps will become increasingly important as health systems prepare for these disruptions.

Healthcare executives should take several key steps to mitigate the impact of these policy changes. Preparing for shifts in payer mix is essential. Hospitals can bolster patient navigation services for those at risk of losing Medicaid or ACA coverage, including early identification of potential financial exposure and ensuring patients are financially prepared for their care through eligibility verification and authorization. Transparent communication will build trust and reduce surprise bills by clearly outlining expected costs, available financial assistance, and payment responsibilities. Flexible payment plans can accommodate varying financial situations, increase collections and patient satisfaction. Reassessing charity care policies and implementing flexible payment plans will also help mitigate revenue cycle disruptions and reduce bad debt risk.

Navigating shifts in tariff polices necessitate that hospitals re-examine the procurement strategies. They should consider diversifying suppliers, prioritizing domestic sourcing, and leveraging value-based purchasing to stabilize costs. Establishing strategic partnerships with group purchasing organizations (GPOs) and manufacturers can further enhance supply chain resilience and purchasing power.

Academic medical centers concerned about potential cuts to NIH grants should identify alternative funding sources. That includes exploring private and philanthropic contributions, establishing partnerships with biotech firms, and assessing the financial trade-offs of sustaining research initiatives. Balancing institutional research commitments with financial sustainability will be key in navigating these funding challenges.

Creating an operating model for the long-term

Financial and operational resilience is the hallmark of successful health systems. Executives should regularly conduct scenario modeling to anticipate margin impacts and adjust cost structures. Efficiency-driven cost reduction strategies — such as workforce optimization, administrative streamlining, and data-driven decision-making — can generate meaningful savings without compromising care quality. Additionally, strengthening revenue cycle management and exploring new reimbursement models will be critical to maintaining financial stability amid economic uncertainty. By being proactive, health systems can mitigate the risks posed by the evolving policy landscape. Strategic planning today will be critical in ensuring long-term stability and sustainability in the future.

Editor’s note: Key assumptions for the analysis in Exhibit 1:

Medicaid: All $880 billion in proposed savings over 10 years comes via Medicaid, assuming funding reduction impacts reimbursement but utilization of services remains unchanged. In reality, impacted beneficiaries are likely to defer care but we did not model the extent of delay and impact on variable cost. On reimbursement, we assumed beneficiaries and services impacted by reduction in Medicaid funding shifts into uninsured where services are billed at Medicare rate but with a higher bad debt ratio upon collection. Lower impact scenario assumes that half of the federal funding reduction is compensated by state funds.

ACA: Enrollment declines up to 6.3%, similar to the impact observed between 2017-2019; disenrolled members shift into uninsured with similar utilization patterns and previous cost base, Medicare level charge rates but higher bad debt ratio. Lower impact scenario assumes no actual impact on ACA enrollment from navigator funding reduction.

Tariffs on Canada, China, Mexico: 4% of total operating expenses are non-pharmacy supply costs that are impacted by tariffs on Canada (25%), China (20%), and Mexico (25%); general share of import to US from Canada (14%), China (14%), and Mexico(15%) applies and all tariffs are in effect. Cost of tariffs are fully passed on to health system purchasers. Lower impact scenario assumes 15% increase in non-pharmacy supply cost because of higher import expenses.

Tariffs on pharmaceuticals: 7%-8% of total operating expenses are pharmacy cost, of which 32.8% are imported and subject to tariff

NIH grant funding: Subsidy amount is highly dependent on institution and decision to fund shortfall through hospital margins is discretionary.

Marlowe Dazley contributed this article.