Our 2025 State of the Industry research explores the growing business pressures across hospital services, network design, drug revenues, and healthcare data that are leading healthcare organizations to make these strategic pivots — and how their choices will reposition power dynamics across the industry.

Hospital services generally rely on a business model that includes high-margin inpatient procedures, a favorable commercial payer mix, and a range of financial supports from investment income to add-on fees to expense discounts. As each of these factors destabilizes, the overall financial model grows precarious.

Facing pressures on the financial viability of their core services, health systems are seeking realistic paths forward. As systems return to disciplined best practices for their operations, they must tailor their management approach — across service offerings, workforce alignment, and patient navigation — to support growth avenues that are suited for their organization and market.

Health systems may have a path to sustain hospital services by focusing on partnerships within their local community to gain needed rate increases for essential services and to engage patients — a difficult endeavor. But if health system market conditions are unfavorable, they may need to further lean on ever-larger regional enterprise consolidation for survival.

Expanding population needs and treatment options continue to increase demand for care, while inflation, capital, supply, and labor challenges increased delivery costs — culminating in several years of above-average rate increases for purchasers that are unsustainable. While health plans try to balance network access with costs as the intermediary, employers are increasingly vocal about rate hikes.

Providers, health plans, and employers are reevaluating their traditional broad approach to network design and participation. Providers are no longer making decisions about payer contracts on base reimbursement rates alone, but now heavily incorporating denial rates and administrative burden. Health plans and employers are increasingly willing to eliminate key, costly provider organizations — if they can navigate their members through an increasingly fragmented network.

As health plans and providers build fragmented networks, they may gravitate toward more selective partnerships with shared strategic alignment, and advocacy efforts will increasingly reflect organizational alliances rather than traditional sector identities. But without longer term commitment and compromise, most contracting decisions default to cost minimization and commoditization.

As drug development innovation accelerates and high-cost transformative therapies continue to become available, drug spending is ballooning. At this rate, drugs will become the largest spending category in the not-too-distant future. Purchasers are more aggressively trying cost-management strategies to prepare while still trying to expand patient access to extraordinary treatments.

In response to purchaser pressures, pharmacy stakeholders are diversifying their services and business models. Notably, PBMs have shifted their major margin sources and begun to connect the different segments of their enterprises to offer new services. Hospitals seeking to catch up are beginning to integrate their pharmacy services into their broader enterprise strategy and management.

Changes to strategy in search of lowering costs for purchasers will put PBMs, manufacturers, and hospital-owned specialty pharmacies in greater tension with each other. Their moves and countermoves will prioritize decreasing purchaser spending by reducing margins for counterparts, rather than themselves — and will leave an open question over the degree of new savings passed to purchasers.

Healthcare organizations today operate amid vast cyber interdependencies as they digitally share exponential amounts of data across the healthcare ecosystem. Recent cyber outages and attacks have proven the industry should expect disruptions as inevitable.

While cyber vulnerabilities are impossible to eliminate fully, healthcare organizations are reassessing how they approach partnerships with other organizations in the “information economy” of the future and are increasingly looking to limit liability and risk. At the same time, AI technologies are rapidly evolving to create, structure, analyze, and apply healthcare data for real-time use in operations.

AI models will become commoditized technologies, and the true value in healthcare AI will rely on how the models are used to leverage unique data for applications in a specific organization and population. These uses will require industry collaboration to build shared strategic capabilities — which will be difficult when there is also so much need to minimize the liability of consolidating data.

An unforgiving business climate lies ahead, with a diversifying policy landscape, tightening public-private financing via enduring hybrid payment models, and a major shift in our population’s overall morbidity.

Leaders are recalibrating away from top-line growth to prioritize the segments, capabilities, and partnerships that will secure sustainable margins in the future. Their choices today in hospital services, network design, drug revenues, and healthcare data will ultimately shape the power dynamics and relationships across the healthcare sector.

In our upcoming “What CEOs need to know” executive briefing, we’ve compiled our latest research and insights on these topics and more to help you prepare for 2025. Sign up now to be among the first to receive your digital copy.

Then, join us for our next State of the Industry webinar on Dec. 17 at 1 p.m. ET for a deeper examination of the evolving power dynamics across these four areas, and learn performance pivots to prepare your strategy for this new landscape.