Menu
2025 Top Trends
Healthcare M&A activity in both the hospital and physician group areas will accelerate throughout the new year. Cross-market merger activity will continue as markets become increasingly consolidated, and market-leading systems look to expand their geographic reach.
The Trump administration is expected to take a more lenient approach towards healthcare M&A activity, resulting in less regulatory oversight and shorter review timelines. We expect that traditional health systems will drive a growing share of M&A activity, rather than private equity (or other ‘outside’ money).
Additionally, we expect to see health systems increasingly outsource non-core segments of the care continuum, such as home health services, long-term skilled nursing, outpatient behavioral health, and reference lab services. Whether through partnerships or complete outsourcing, these strategic moves will help health systems refine their focus on core operations.
Health system leadership will focus on establishing and advancing strategic collaborations as a key priority throughout 2025 and beyond.
While demand for healthcare services continues to outpace supply nationwide, AI will increasingly show promise at augmenting or even replacing traditional care delivery and support models.
Until now, AI solutions have gained traction in healthcare to varying degrees, but haven’t fundamentally “altered the game”. That changes in 2025 – where the adoption of at least two or three significant AI use cases takes off. Early success stories will likely emerge in clinical care areas that can be digitized and face capacity issues (e.g., radiology, pathology), or critical processes where staffing constraints correlate to inefficiency (e.g., patient monitoring, patient charting, patient scheduling).
Health plans will also take advantage of AI tools to conduct chart reviews and flag billing concerns that are impacting health systems' revenue cycle functions.
As AI's influence expands across the industry, astute implementors will gain an edge through cost savings, improved recruitment and retention, and enhanced productivity.
After experiencing a rollercoaster of financial results from 2021 through 2023 as health systems learned to cope with volume shifts, labor shortages, supply inflation and intermittent government support, 2024 brought a period of relative stability, with average hospital operating margins near 4%. We believe this level of stability will carry forward through the first half of 2025 – with health systems continuing to focus on bottom line initiatives like reducing locums expense, outsourcing non-core services, stabilizing compensation models, and maximizing existing capacity. However, by late 2025, we anticipate a new set of shocks to the system – this time focused on top-line pressures.
While there is still much to learn regarding the personalities and philosophies which will drive the Trump administration’s healthcare policy, Medicaid cuts, site neutrality, ACA defunding, state waiver reversals, and 340B reform are all likely to be considered changes. Meanwhile, policies that could expand funding for health systems – either directly through federal and state government, or indirectly through mandates on Big Insurance or Big Pharma – are missing from the current manifesto. While it is unlikely that the financial impact of any policy changes will be felt in 2025, this uncertainty will undoubtedly contribute to additional M&A activity, even as systems try to preserve liquidity in anticipation of harder times to come.
Maintaining 2024 margins in 2025 and beyond will depend increasingly on systems' ability to maximize revenue streams – through volume growth and/or increasing complexity – while closely monitoring the new administration's direction on supplemental payments and payor landscape.
While most health systems still rely on fee-for-service (FFS) revenue for financial sustainability, value-based care (VBC) continues to gain traction as a growing share of total revenue. Enthusiasm remains strong in the industry for re-imagining care models that improve health outcomes while reducing the cost of care, with Kaiser Permanente’s new subsidiary, Risant Health, the latest attention-grabbing entity in this space.
CMS remains committed to having most of its Medicare beneficiaries in various VBC arrangements by 2030, and the new administration appears to be bullish on Medicare Advantage plans. While we expect more health systems to choose to go out-of-network with select Medicare Advantage plans, the pressure to expand into shared upside/downside risk is mounting. Additionally, concierge medicine continues to grow in popularity as patients face increased wait times and access challenges across the industry.
In 2025, we expect non-FFS revenue to represent a larger share of total health system revenues, with successful institutions preparing for an increasingly uncertain healthcare landscape by leveraging innovative payment models to stay ahead of the curve.
In recent years, numerous studies have highlighted the growing strains on clinicians across every area of healthcare delivery. Recently, there has been increased awareness of generational differences between newly entering healthcare providers and seasoned veterans in the workforce. Differences in expectations across generations along with increased demands have pushed many healthcare workers to leave the field, further exacerbating workforce shortages and jeopardizing the healthcare professional talent pipeline.
Employing physicians is only going to get more expensive, with the reduction to the 2025 Physician Fee Schedule requiring further subsidization from technical revenue streams. The key to success remains the same: finding the right balance of productivity and compensation. However, achieving that balance at varying productivity levels will be more critical than ever, making the right staffing model (across physicians, APP, and support roles) essential.
Service growth has kept demand for providers high, and successful recruitment and retention in 2025 will rely increasingly on packages with various benefits outside of strictly compensation (e.g., admin time, partial FTEs, etc.). With different models needed, establishing and balancing cultures will be increasingly difficult, and creative systems will have a leg up. Those unable to adapt in 2025 will begin to see increased subsidies and risk of turnover and burnout — all expensive implications.
2024 Top Trends
Union influence has increased over the past three years in the healthcare industry. Today, about 15% of all healthcare workers are part of a union, a number still well below many other industries. We expect that unionization, and healthcare worker interest in unionization, will continue to increase in 2024. Outside of unionization, we continually see lower utilization of traveling healthcare workers, and staffing continues to be a struggle for many health systems. We expect that overall utilization of traveling workers will continue to decrease in the coming year, while a longer-term steady state is still unknown.
M&A activity has been heating up across the healthcare delivery industry after historically low activity levels in 2021. Last year, there was an uptick in cross-market activity due to the FTC’s opposition to in-market mergers. In response, we expect that states will push to create more mechanisms that allow them to exert more influence over future M&A activity, resulting in a shift of oversight from the federal government to the states. Additionally, as health systems continue to grow in terms of revenue and employees (both organically and inorganically), they are becoming much more indispensable to their regional communities – to the point where many are now “too big to fail” and will need to be bailed out in the event of financial failure. This could increase the willingness of health systems to approve higher risk initiatives, and similar to the banking industry after the 2008-2009 financial crisis, would ultimately result in more regulation.
In general, hospital financial performance improved in 2023. However, many health systems have struggled with the lack of COVID-era funding, a surge in expenses well above rate increases, and other headwinds within the industry. Given the slight overall financial performance improvement from 2022 to 2023, we expect that 2024 will reveal whether we have surpassed the bottom of the post-covid dip. Nonetheless, with rate increases still expected to lag compared to expense inflation, we expect health systems will increasingly try to diversify their revenue streams beyond patient care sources in the upcoming year.
Over the past few years, entrance of private equity and other non-traditional players in the healthcare industry has increased. In 2024, we expect there will be more outside money entering the industry, particularly from an M&A perspective. Additionally, we expect Retail Healthcare to attract non-traditional investment sources despite its questionable financial viability.
Across the country, demand for healthcare professionals outweighs the current supply. This gap is too large to address in the short-term by training more professionals alone. Therefore, care delivery must become less labor-intensive, which presents an opportunity for AI to augment the current labor force. In 2023, we saw early adopting providers beginning to implement cost-reducing AI. Looking ahead to 2024, we expect such AI systems will proliferate across the industry.
your privacy is important. all submitted information is confidential and transmitted securely.
