Financial sustainability is biggest pain point for healthcare leaders
As non-labor expenses and bad debt rise, protecting hospitals’ financial outlook through cost-cutting maneuvers and revenue generation takes priority for CFOs.
If Claire Agnew could help healthcare boards understand one thing about healthcare finance, it’s the complexity finance leaders face in ensuring hospitals and health systems have the resources they need to deliver great care.
“It’s brutal and much like dancing backward in high heels,” said Agnew, MBA, CPA, executive vice president and CFO for Valleywise Health, a publicly funded health system based in Maricopa County, Arizona.
“There are always new, unfunded regulations, rapid technological advances, the need to lower costs during times of inflation, local competitive changes, payer shenanigans, a press that is fickle toward healthcare and a focus on always providing quality care with great customer service,” she said.
ensuring health systems have the resources they need to strengthen access to care.
Healthcare climate hints at uncertainty
Today, even as healthcare analysts and rating experts attest to a stable financial foundation and outlook for much of the not-for-profit hospital sector, there’s a sense among hospital CFOs that their organizations are operating in the eye of the storm.
“We’re working with organizations and operators who are saying, ‘This is the most challenging [financial] climate that we’ve ever been in,” said Gavin McDermott, managing director with Chicago-based Kaufman Hall.
It’s a sentiment that was echoed by healthcare CFOs during HFMA’s Annual Conference this past June and one that was also reflected in a 2025 survey of healthcare leaders, who identified financial sustainability as their organization’s biggest pain point.a
Amid rising non-labor expenses and bad debt, a significant uptick in charity care and looming cuts to federal Medicaid funding, leading CFOs say healthcare organizations face intense urgency to enact new strategies for overcoming financial headwinds.
“This can’t be the incrementalism of the past,” said Stephen Forney, FHFMA, MBA, CPA, CFO and senior vice president for Covenant Health, Andover, Massachusetts, a nonprofit, regional healthcare system. “It’s time to consider: What’s a big, bold way to do things? What are the wildly successful things other health systems are doing — and are those things applicable to my system?
“The focus needs to be on big things that have strong impacts, initiatives that maybe there wasn’t the political or institutional will to do in the past,” Forney said. “There can’t be sacred cows.”
Financial pressures tighten
Despite reporting a favorable outlook for the healthcare sector, Fitch also echoed providers’ concerns in its recent healthcare sector report, noting that the “tone, but not the outlook … has turned decidedly negative.”b
That’s due in part to the anticipated impact of $1.1 trillion in federal healthcare spending cuts over 10 years under the One Big Beautiful Bill Act (OBBBA), including significant reductions in federal Medicaid spending. These cuts “represent the greatest threat to not-for-profit hospital operations and cash flow,” the rating agency stated.
Fitch believes hospitals’ focus on cost-cutting and revenue generation will drive financial improvement over the next 18 months. So why do healthcare finance leaders feel less optimistic?
Blame the financial aftereffects of COVID-19 — at least in part.
“We had come out of literally the worst financial performance of the industry in 2022,” McDermott said. “Now, median margins for the healthcare industry are in the 2% to 3% space — not all the way to pre-COVID margins, but pretty close — and there’s a cohort of organizations that implemented a series of actions that got them back to a level of profitability. They’re looking at the horizon of all these headwinds that are coming forward, and they’re thinking, ‘I just pulled all of these levers, and now, I’ve got to deal with this next set of challenges.’ It’s pretty daunting.”
Add to that the fact that more than one out of three organizations are still losing money.
“The delta between the really high performers and the really low performers has actually never been wider,” McDermott said. “So this idea of financial sustainability is weighing so heavily right now because for large chunks of the country, [the financial performance of hospitals and health systems] is not sustainable. And the future outlook and growth prospects don’t really support a thesis that things are going to get easier.”
Even organizations that are considered financially healthy are susceptible to growing pressures.
“Business as usual is not producing the usual results,” said David Burik, partner, Guidehouse, and leader of Guidehouse’s Center for Health Insights. “As CFOs look at the federal budget, instead of seeing relief, they’re seeing a doubling down on those pressures.
“The problem is not going to go away on its own. It requires explicit action,” Burik said.
Other factors contributing to concerns about financial sustainability include payer consolidation, shifting demographics, changing business
models and constrained resources.
While healthcare has faced cyclical headwinds before, the combination of multi-year inflation well above historical norms, rapid regulatory shifts and national clinician shortages signals a structural reset for the industry, not a temporary disruption, according to Mark Henrichs, associate vice president for finance and CFO, University of Iowa (UI Health Care) in Iowa City.
“The difference today is the speed and structural nature of change,” he said.
In this environment, Henrichs believes meeting the growing demand for services while managing these inflationary forces requires constant focus on innovative approaches and solutions.
Forging new paths to financial sustainability
To secure and maintain their organizations’ financial sustainability, healthcare CFOs should not rely on legacy playbooks but, instead, begin establishing their point of view on what the future will look like, including the likely changes in care delivery and reimbursement models and in their local and macro environments. It will then be critical for them to orient their strategies accordingly.
“We’ve worked with a lot of organizations that are very reticent to do that because of the murkiness [of the industry’s future state],” McDermott said.
From there, leaders should work to develop strategies for mitigating the risks their organization will likely face.
“Sometimes, there’s a tendency to say, ‘We don’t know what’s going to happen, so let’s not put any thought energy toward that,’” McDermott said. “But our point of view — and this is where we still believe scenario planning has its place — is that by bringing those discussions front and center for the organization, it really allows the organization to be more flexible and nimble in determining how to combat what’s going to be a very difficult future.”
Now is also the time for tough conversations around service line affordability, examining whether a service generates a sustainable margin after costs and subsidies are factored in.
“I do think a lot of organizations will be presented with choices related to service line sustainability: ‘We can’t afford to do X anymore. We can’t afford to do Y anymore,’” Burik said.
However, Burik noted, given the sensitivity around the potential impact of ending an essential-but-unprofitable service line, from maternity care to behavioral health, it’s important to explore options for cost reduction and revenue generation in other areas first.
What this might look like in action: “Let’s sharpen our pencils and upgrade our thinking from a digital perspective and see where that takes us,’” Burik said.
Making the right moves
How are leading organizations exploring ways to strengthen sustainability in an era of uncertainty? Interviews with industry leaders point to the following actions.
1 Explore new ways to generate or protect revenue. “There’s a focus on high-margin revenue diversification that may or may not be connected to an organization’s mission,” Burik said.
In fact, he said, it seems that some providers are pushing to try more aggressive, innovative investment approaches.
Making higher-margin services more accessible for consumers, such as opening a freestanding cancer center, is one strategy organizations are undertaking to boost revenue. Another is to thoughtfully invest in and deploy digital offerings that deepen connections with consumers, strengthen access to care and improve the patient experience.
“You’re not going to be able to grow unless you have incorporated new digital tools into your operating model successfully and in a differentiated way,” Burik said.
2 Secure higher levels of payer-provider alignment. At UI Health Care, for example, efforts to build better collaboration with commercial payers are considered essential, Henrichs said.
“To succeed, we will need ongoing payer support that reflects real cost pressures,” he said.
Nationally, nearly three out of four healthcare CFOs responding to a 2024 HFMA survey said improving payer-provider relations is one of their top priorities or that they have delegated this responsibility to team members and expect significant improvements.
“The old days of demonizing the payers has no benefit to driving new value today,” one CFO respondent said.
3 Brainstorm cost containment opportunities across teams. One approach might be for the CFO to collaborate with the organization’s chief nursing officer (CNO) in uncovering ways to reduce excess costs. At Valleywise Health, Agnew and the organization’s CNO led discussions with teams of nurses throughout the organization, generating ideas on ways to reduce length of stay, improve timeliness of discharge, decrease supply costs by specialty area and more.
“Discussions like these are empowering nurses to think as if they were the CEO of their area,” Agnew said. “The nursing leaders were excited. They were asking questions. They were taking ownership because they are invested in our health system and the vulnerable populations we serve, and they want to get involved.”
quality of care and expand the range of services the health system provides.
4 Evaluate innovative approaches to outsourcing. Health systems are increasingly looking to outsource key operational components, with an emphasis on outsourcing revenue cycle processes.
“I think people across healthcare are coming around to the idea of outsourcing revenue cycle,” Forney said. “Our industry has the most complex revenue cycle of any industry, and we feel like we should be doing it ourselves, that it should be a core competency. But I have seen the benefits of outsourcing revenue cycle consistently throughout my career. Twenty years ago, this was a radical concept. Now, these types of models are proving themselves out.”
Similarly, outsourcing IT services has significantly increased the quality of IT support the health system receives, with a rise in first-call pickups and resolutions and a more agile crisis response.
One essential element for success: maintaining a sense of ownership over the service no matter who the health system selects for a partner.
“I think the real key here is the recognition that just because you outsource something doesn’t mean you’re not responsible for it,” Forney said. “It takes a lot of preparation to do this correctly and make sure the transition to an outsourced function goes smoothly.”
(See also, following this article, three case studies describing actions of Valleywise Health, UI Health Care and Covenant Health.)
Protecting a vital resource
Healthcare CFOs must be able to tell their financial sustainability story to their teams, boards and communities as bold moves for protecting their organization’s ability to provide care are rolled out.
“I’m finding out that we can’t be the usual CFO. We have to be able to communicate our vision with a broad range of stakeholders, whether that’s talking with people in the hospital, working with community groups or engaging our boards,” Agnew said. “It’s no longer about saying, ‘Here are the numbers.’ It’s about being transparent about the potential impact of disruption and the types of investments and support that are needed to protect the future of the organization. It’s a different skill set that CFOs might have needed in the past — but it’s an incredibly powerful way to build trust.”
Footnotes
a. Vizient, “Healthcare leaders identify financial sustainability as their biggest challenge,” Feb. 21, 2025.
b. Hut, N., “Ahead of expected turmoil, the hospital sector is on solid footing,” HFMA, Aug. 13, 2025.
Case study: How Valleywise Health redefined itself
At Valleywise Health in Maricopa County, Arizona, leaders actively seek support from the community it serves to invest in new services or expand access to specialized care. In 2014, leaders of the health system, which serves a disproportionate share of low-income and uninsured patients in the Phoenix area, appealed to voters to help replace an aging facility and renovate other locations through a $935 million public bond.
The new hospital, which opened in 2024, is home to the second-largest burn center in the country, providing care for both adults and children.
It is also the only public teaching hospital in the state. Funding for specialized services such as comprehensive burn survivorship care, Level 1 trauma care and innovative approaches to behavioral health is made possible through the health center’s charitable funding arm, the Valleywise Health Foundation.
In November, Valleywise Health will again appeal to the community it serves for capital funding, this time for a $898 million bond that would position the health system to build a 200-bed behavioral health hospital, among other projects.
“We still have older buildings that we have to replace, including an inpatient behavioral health building that opened in the early ‘70s,” said Claire Agnew, executive vice president and CFO.
Valleywise had worked to restore access to inpatient behavioral healthcare in 2024 after a shortage of mental health professionals following the pandemic forced the health system to close three behavioral health units.
“That’s the initiative that’s closest to my heart,” Agnew said. “You can have the greatest care from the best physicians and nurses, but to be cared for in a new facility with bright light coming in, it really does help patients heal. And those patients need that type of healing environment just as much as our burn patients do.”
Case study: UI Health Care pursues cutting-edge analytics
University of Iowa Health Care (UI Health Care) in Iowa City has undertaken efforts to combine evidence-based protocols with advanced analytics across inpatient, outpatient and ancillary settings, which are improving length of stay (LOS), OR utilization and radiology throughput. Mark Henrichs, associate vice president for finance and CFO, noted that the initiatives include the following.
Deploying geolocalization. Leaders reimagined how and where inpatient specialty care is delivered, with a focus on ensuring specific types of services could be delivered in a single area. This approach optimizes efficiency for physicians and staff while allowing for closer relationships between specialty physicians and nurses. Within a year of deploying geolocalization, UI Health Care decreased excess patient days by 5,000.
Optimizing OR throughput. UI Health Care uses a proprietary AI-powered approach to transformation to identify inefficiencies in OR scheduling, like underutilized blocks or factors that contribute to last-minute cancellations. From there, teams use the data to propose changes that better align OR time with demand and surgeon availability. The approach reduces idle time and increases case volume without adding resources. It also improves patient access and physician and staff satisfaction while strengthening financial performance, Henrichs said.
Applying advanced tech to MRI availability. A tech-enabled analysis identified opportunities to reduce template times for MRI scans, increasing capacity for MRI appointments. The resulting template optimizations drove more than $2 million in new revenue over 18 months.
One lesson learned: “There has to be a constant focus on what the goal is,” Henrichs said.
On nursing units, for example, “We’ve seen a little bit of slide in the past six months on LOS, so it’s something that you’ve got to work at every day. And there’s still more [LOS] opportunity that we can take out of the system,” he said.
Case study: Covenant Health pursues revenue cycle outsourcing
The move by Covenant Health, a nonprofit, regional healthcare system based in Andover, Massachusetts, to outsource revenue cycle operations in 2019 has resulted in a net revenue lift of $57 million annually while decreasing costs. In 2022, the health system applied the same approach to IT services and leadership, a decision that Stephen Forney, FHFMA, MBA, CPA, Covenant’s CFO and senior vice president, estimates will generate $70 million in savings over 10 years.
Much of Covenant’s success in revenue cycle outsourcing has come from a more sophisticated approach to denials reduction, charge capture and coding than the health system was able to achieve on its own.
Covenant’s outsourcing partner “was very early to apply AI to coding, and they’re just accelerating that,” Forney said.
Covenant compared the AI tool’s performance to the support it formerly received from a physician group it had contracted with to review select DRGs and found that the automated tool assigned DRGs faster and more accurately.
“Now, we’re in the process of training an AI product to do both hospital and physician coding,” Forney said. “We’re also beginning to implement AI for customer service in revenue cycle —and the degree to which this AI agent can speak in a natural, conversational way is remarkable.”
