Hospitals and health systems are navigating a period of unprecedented financial uncertainty as proposed changes at both the state and federal levels threaten to reshape reimbursement structures, disrupt funding mechanisms and jeopardize long-term financial stability.
While hospital leaders across the country are closely monitoring these developments, a passive or “reactive” approach could leave organizations vulnerable to major financial shocks, according to a March 25 report published by Kaufman Hall.
The recent budget resolution passed by the House has triggered policy discussions that could significantly reduce Medicaid funding. The House Energy and Commerce Committee, which oversees Medicare and Medicaid, has been tasked with reducing federal spending by $880 billion over the next decade. Potential measures include:
- Medicaid work requirements
- Lower federal rate payment floors
- Changes to graduate medical education funding
- Site-neutral payments for Medicare
At the same time, hospitals are contending with additional financial headwinds. The National Institutes of Health has proposed caps on indirect costs for research grants — posing a threat to the financial stability of academic medical centers. While a federal judge has issued a preliminary injunction against these cuts, the final outcome remains uncertain. Meanwhile, potential tariffs on medical supplies could further squeeze hospital budgets.
“For healthcare finance leaders, the current financial uncertainty is resurfacing memories of the onset of the COVID-19 pandemic in 2020 and the 2008 financial crisis, both instances where providers had to react to massive financial changes in a short period of time,” Kaufman analysts wrote in the report. “And unlike the short-term financial dislocation of the initial severe impacts of COVID-19 — when providers were forced to sideline outpatient operations and other services for several months — the duration of these proposed policy changes is highly uncertain.”
While many hospital leaders are concerned, few are certain how to proactively respond. However, a “wait-and-see” approach may leave hospitals exposed — particularly if they haven’t accounted for potential drops in supplemental federal funding, increased self-pay volumes or shifts in reimbursement, according to the report.
Rather than waiting for policy changes to take effect, Kaufman Hall argues health system leaders must engage in scenario planning to evaluate potential impacts and develop strategic responses. By modeling different policy outcomes, hospitals can assess financial risks, adjust capital plans and identify operational efficiencies to offset potential revenue declines.
Key considerations for financial planning include:
- Identifying factors driving financial uncertainty and evaluating their impact on sustainability.
- Assessing potential political and regulatory outcomes that could affect financial operations.
- Analyzing how changes in Medicaid, Medicare and other funding sources will affect a hospital’s operations and balance sheet.
- Exploring mitigation strategies to maintain financial resilience in a shifting policy landscape.
To safeguard financial stability amid these uncertainties, Kaufman Hall recommended health system leaders take the following steps:
1. Develop contingency plans: Identify cost-saving opportunities, performance improvement initiatives and capital flexibility strategies to mitigate financial risks.
2. Educate stakeholders: Ensure board members, finance committees and internal leadership teams fully understand the financial implications of proposed policy changes.
3. Engage in advocacy: Identify high-risk proposals that could negatively impact patient care and hospital finances, and communicate these concerns to local, state and federal officials.
4. Monitor legislative developments: Maintain a structured approach to tracking policy changes and assessing their potential impact on financial operations.
The Kaufman Hall report was authored by Brian Ball, senior vice president, along with Gavin McDermott and Gordy Sofyanos, managing directors and practice co-leaders in financial planning and data analytics.
Click here for more details on the report.
