It’s budget season, which means health system leadership teams across the country face the unenviable task of distilling an unparalleled confluence of sometimes conflicting market forces into a single forecast. Budgets serve as a forcing function that compels leaders to confront trends and recognize the transformations necessary to position the organization for long-term success.
The headwinds are well understood: an aging population shifting payer mix toward Medicare and Medicaid, persistent cost inflation in labor and supplies, ongoing policy and employer pressure on reimbursement, and a legislative environment that remains fluid.
Three financial scenarios shaping the future of health systems by 2030
To quantify that compounding effect, we modeled three scenarios for the typical health system through 2030: a “baseline” reflecting current legislation in a stable economy, a “rainy day” scenario marked by unfavorable policy and economic contraction, and a “critical but stable” scenario where economic growth and favorable policy help offset some headwinds. The finding that unifies all three? Margin impact is negative across the board, ranging from approximately a decline of five percentage points to negative 15 percentage points, relative to a 2025 baseline. There is no scenario in which the status quo is financially sustainable.
When we asked health system leaders which future they were planning for, more than 80% indicated they expected a margin impact consistent with our baseline scenario or worse; that is, a 10-point or greater decline by 2030. Leaders are not underestimating the challenge.
How health systems can reverse declining financial margins
Regardless of which scenario materializes, the implication is the same: Health systems will need to undergo significant transformation to avoid the worst-case outlook. The question for leaders is how much transformation they should take on and how quickly?
We think about that transformation across three levels:
- Transformation 1.0: improving how we deliver care today
- Transformation 2.0: changing what we do and how we configure our assets
- Transformation 3.0: developing new sources of value and revenue
Historically, many health systems have tackled operational improvements first and moved on to portfolio and business-model changes only as needed. In today’s environment, that approach is no longer viable. Given the financial trajectory these scenarios project, leaders must pursue all three levels concurrently, assuming that change on each level is necessary.
While each level carries its own distinct challenges, each can play a meaningful role in helping systems close the financial gap when framed appropriately.
Transformation 1.0: The temptation, particularly for systems that have already invested heavily in operational improvement, is to assume the remaining opportunity is limited. The data suggests otherwise. At a national level, we continue to see wide variation in utilization, quality, and access — risk-adjusted length of stay that can vary by as much as double for the same patient type, readmission rates that sometimes differ by between 1.5 and two times and wait times for specialty care that can be as much as eight times longer within a single market. These are not marginal inefficiencies. Other industries, such as logistics, aviation, and financial services, have demonstrated that it is possible to achieve consistently high-quality outcomes despite highly variable and complex inputs. Healthcare has significant room to close that gap, and the financial returns would be material.
Transformation 2.0: This is where strategic conversations become most difficult because they require decisions about which service lines to expand or rationalize, which markets to invest in, and which sites of care to reconfigure. Unfortunately, these inherently high-stakes decisions often generate predictable organizational resistance.
But the true intent of Transformation 2.0 is not to choose favorites, but rather to reshape supply to match evolving demand. Viewed through that lens (and grounded in data), these conversations become substantially less political. A decision about keeping or shedding an asset is not a judgment about a leader’s competency in running it. The question often being resolved is whether community needs can be better met through a different configuration of care.
Transformation 3.0: The most common objection to new revenue models is that they feel too distant from a health system’s core identity — too risky, too unfamiliar, too far from their clinical or academic missions. Once again, a look at other industries offers a useful counterpoint. Delta Air Lines derives all of its margin from its credit card rewards program. Amazon Web Services accounts for the majority of Amazon’s operating profit. Disney’s theme parks generate more operating income than their studios. In each case, the new source of value is distinct from the core offering, while still entirely dependent on it. Travelers are more likely to apply for a Delta credit card if they fly Delta frequently and can take advantage of special benefits associated with flying Delta, such as mileage awards. The intent of Transformation 3.0 is not to change a health system’s DNA, but to find adjacent ways to capitalize on it through vehicles that leverage the patient relationships, clinical expertise, and community presence that health systems already hold.
Six ways health systems can achieve financial sustainability
In most leadership conversations, the case for transformation is well understood, even universally accepted. The distance between that conviction and concrete organizational action is where most agendas stall, and the financial environment leaves little room to close that gap slowly.
We see six steps that can mobilize an organization around this agenda:
1. Agree on a planning range. Build a local scenario model that identifies the assumptions most directly driving the system's outcomes. Quantify the gap between the current trajectory and financial targets across scenarios so that leaders solve for a shared, clearly defined objective.
2. Define no-regrets Transformation 1.0 targets. Quantify the remaining opportunity in length of stay, throughput, labor productivity, revenue cycle, and access. Establish consistent performance benchmarks and hold them. This will free organizational bandwidth for the harder decisions at 2.0 and 3.0.
3. Make the Transformation 2.0 decision inventory explicit. Identify the hospital, service-line and partnership decisions that will become more difficult (or costly) if deferred, while also targeting the markets, capabilities, and modalities where delay could cede ground to competitors.
4. Select two or three Transformation 3.0 hypotheses to test. Include both reimbursement-linked and non-reimbursement-linked opportunities. Approach each with a defined investment thesis and a clear expiration date. If a pilot or proof of concept cannot demonstrate value or viability within an agreed timeframe, move on.
5. Establish capital and ownership logic. Determine what the organization can fund internally, what requires external capital, and what is best pursued through partnership. Equally important is establishing the governance structure that will oversee it: a dedicated body with the authority, visibility, and mandate to track progress across all three transformation levels, make resource trade-offs, and hold initiative owners accountable for results.
6. Agree on what not to do. A transformation agenda that adds without subtracting is a wish list, not a strategy. Defining what the organization will stop doing, stop owning, or stop funding is what creates the capacity to execute on what actually matters.
Every health system’s path through this environment will look different, and every health system will look different on the other side. The challenge for leaders is whether they have the discipline to embrace this transformative moment proactively and be the author of their organization’s next chapter, or whether they allow market forces to define their future.