Hospitals, health systems, and physician practices are recalibrating their operational and financial strategies to navigate evolving federal regulations, according to a recent KLAS Research survey. The survey, which included responses from C-level executives, vice presidents, and directors, found that 86% of healthcare organizations have contingency plans in place to address these changes.
Key Challenges: Medicaid Cuts and Rising Costs
The passage of the One Big Beautiful Bill Act (OBBBA), signed by President Donald Trump over the July 4 holiday, introduces significant tax cuts, increased military and immigration enforcement spending, and substantial reductions to Medicaid, SNAP, and clean energy funding. These changes, particularly Medicaid cuts, are a major concern for 71% of healthcare leaders, who cite reimbursement reductions as the most significant negative impact of federal policy shifts.
A vice president from a small health system noted, “Medicaid funding cuts and tariffs will increase the number of patients unable to pay for care. State mandates prevent us from pursuing patients for payments, and with federal insurance cuts, we’re left with no funding to cover expenses.” This has led to rising bad debt, as patients increasingly opt for high-deductible or catastrophic health plans, leaving providers with uncollectible out-of-pocket costs.
Fitch Ratings projects that OBBBA’s Medicaid cuts, set to take effect in 2027 or later, will pose long-term challenges for not-for-profit hospitals, particularly those in states with expanded Medicaid programs or high Medicaid patient volumes. Additional pressures include tariffs, executive orders affecting the 340B drug program, site neutrality policies, and cuts to federal research funding, all of which could strain operational costs and cash flows.
Strategic Responses
Healthcare organizations are adopting varied contingency plans to address these challenges:
- Workforce Restructuring (26%): Academic health systems are most likely to pursue layoffs, hiring freezes, or salary adjustments, with patient-facing roles least affected.
- Spending Cuts (18%): Reductions in capital and discretionary spending are common, particularly in administration and IT.
- Service Realignment (17%): Some organizations are scaling back low-margin services like palliative care or shifting hospital-at-home programs to traditional settings.
- Value-Based Care Strategies (17%): Leaders are focusing on contracts with upside-risk or capitated arrangements to stabilize revenue.
- Revenue Growth and Reserves (15% and 14%): Organizations are exploring external funding and leveraging balance sheets.
- Technology Investments (5%): A smaller group is prioritizing automation and AI to improve efficiency.
Smaller practices are also tightening financial policies, such as discharging patients with balances exceeding $300 or considering dropping Medicaid patients if cuts deepen.
Technology and AI Investments
Despite budget constraints, 75% of healthcare organizations are maintaining IT budgets, focusing on vendor partnerships and tools with quick returns. Investments are increasing in:
- AI and automation (39%)
- Cybersecurity (31%)
- Hardware/software costs (27%, driven by tariffs and inflation)
- EHR optimization and integration (12%)
Health systems are prioritizing AI and hardware, while physician practices focus on cybersecurity and EHR projects. A C-level executive from a large health system emphasized, “We anticipate significantly more spending on AI, data infrastructure, cloud migration, and device strategy to reduce administrative burdens.”
Payer and Partnership Shifts
Healthcare leaders are reevaluating payer partnerships, particularly Medicare Advantage contracts, to optimize value-based care models. Providers are seeking payers offering predictable payments, flexibility, or better incentives. A chief medical information officer noted, “We’re maximizing opportunities in contracts with upside and downside risk to ensure financial stability.”
Looking Ahead
While most organizations face challenges, some see potential benefits in deregulation and cybersecurity rules. KLAS recommends that providers make strategic service cuts, adjust payer strategies, and explore collaborative partnerships. Payers should prioritize reimbursement stability and value-based care discussions, while vendors should focus on cost-mitigation solutions and adapt to longer sales cycles driven by strategic uncertainty.
As federal policy changes unfold, healthcare organizations are balancing cost management with targeted investments to ensure resilience and maintain patient care quality.