Health systems face margin cuts of up to 13 percentage points in next 5 years, McKinsey analysis shows

A combination of federal policy changes and industry trends could cut health systems’ margins by as much as 13 percentage points in the next five years, according to a McKinsey analysis.

The consulting firm’s analysis concluded that a combination of regulatory and legislative changes, tariffs and clinical staff shortages would cut margins over the coming five years anywhere from 2 percentage points to 13 percentage points, depending on how policies specifically unfold and specific characteristics of organizations.

Policy effects

The biggest potential margin impacts were expected from federal healthcare regulatory and legislative changes. Those could drive margin cuts ranging from 2 percentage points to 11 percentage points.

Most impactful were policy changes included:

• Changing the 340B discount drug program
• Implementing more site-neutral payment
• Reducing Medicaid and ACA marketplace enrollment
• Changing tax treatment

Medicaid and exchange enrollment decreases could be driven both by provisions of the One Big Beautiful Bill Act (OBBBA) and the 2026 expiration of exchange subsidies. Large OBBBA impacts on Medicaid enrollments were not expected for a couple years but exchange enrollment decreases could begin next year and rise to 7 million if COVID-era subsidies expire.

Chad Mulvany, director healthcare consulting for Forvis Mazars, said increases in uninsured patients are leading concern for health system leaders worried about increases in uncompensated care costs. Some health system leaders he has talked to already are seeing increases in uninsured patients due to general economic trends.

He was not optimistic Congress will extend the COVID-era ACA subsidies.

“Particularly if you’re in a non-expansion state, that’s going to be a big one,” Mulvany said about margin impacts from ACA enrollees dropping coverage.

He expected state legislation as soon as 2026 to prepare for OBBBA policy changes on state directed payments and provider taxes, which could negatively impact health systems. Such state actions could have similar effects as a 2025 North Carolina cut in its Medicaid provider payment rates in order to address budget challenges unrelated to OBBBA.

Site-neutral payment cuts were recently finalized for outpatient drug administration services starting in 2026 through the outpatient prospective payment system (OPPS) final rule.

However, those cuts were only a small slice of the $146 billion comprehensive site-neutral payment policy in Medicare that Congress proposed earlier this year. So, legislators could look to implementing more of those if they needed a way to pay for other priorities.

“I still think Congress would consider site-neutral [cuts] if they needed an offset,” Mulvany said.

340B. Another OPPS policy was to restart paybacks from most hospitals that received a boost when the first Trump administration cut Medicare 340B payments. The payback will come through a 0.5% cut to OPPS rates in 2026 but that could jump to a 2% cut in 2027, CMS said.

Another 340B-related cut will come through the 340B rebate demonstration, in which manufacturers could offer retrospective rebates instead of prospective discounts for 340B drugs.

Some health systems have warned they will have challenges in submitting the required data from medical claims in order to receive the rebate, Mulvany said.

The OPPS rule included formal plans to conduct a survey of hospitals’ drug acquisition costs during Q1 2026 and every four years thereafter. That came after the Supreme Court nullified a 340B cut in the first Trump administration due to CMS not conducting a statutorily required comprehensive survey of drug acquisition costs before implementing that cut.

“I’m assuming that in the 2027 rule we get a proposed separately payable Part B cut for 340B-acquired drugs,” Mulvany said.

He expected future 340B cuts will be more substantial than the last cut, which dropped the payment rate from average sales price (ASP) plus 6% to ASP minus 22.5%.

Other factors

McKinsey also cited uncertainty over tariff impacts, which potentially could hit health system margins. It cited trade-weighted U.S. tariff rate increases from about 2.2% at the start of 2025 to 16.9% as of Aug. 8, 2025.

“Depending on what tariffs and tariff levels remain in effect (including the Section 232 tariffs for pharmaceutical products), we estimate health system spending on medical supplies and pharmaceuticals could increase by 0.2 (percentage points) to 8.4%, equal to up to 1.7% of total operational spending and corresponding margin pressure,” said the report.

Another margin pressure to watch is heightened clinical supply-and-demand shortages, according to McKinsey.

“Rising utilization from an aging population is colliding with clinical workforce shortages, exposing a growing mismatch between demand and available capacity, straining quality and access and raising costs,” said the report.

It noted that the demographic cohort of 70 years and older is expected to grow fastest of all age groups over the latter half of this decade, which was expected to accelerate the demand for healthcare. The resulting increase in medical utilization could lead to higher medical costs and cost pressure for healthcare organizations.

Mark Pascaris, senior director for Fitch Ratings, cited similar concerns over a “demographic cliff” around 2030, as the last of the baby boomers leave the workforce — and drop commercial insurance — and join Medicare.

“They’re going to leave the workforce right at an age where they are going to need more healthcare services,” Pascaris said in an interview.

Health systems may see margin pressure of up to 0.5 percentage points as continued clinical staff shortages increase labor cost per medical case and exacerbate the existing mismatch between clinical supply and demand, said the McKinsey report.