Gathering storm 2.0: Succeeding in healthcare despite the turbulence

In 2022, McKinsey anticipated a “gathering storm” that would challenge affordability and access in healthcare, threatening the industry’s economic outlook.¹Addie Fleron and Shubham Singhal, “The gathering storm in US healthcare: How leaders can respond and thrive,” McKinsey, September 8, 2022. At the time, rising healthcare input costs were being felt primarily by health systems. But our analyses led us to believe that these higher costs would eventually be passed on to payers and employers as well, leading to compressed margins unless the industry acted to increase productivity.

This forecast has largely been realized: Employers are facing nearly double-digit rate increases. Payers are contending with rising healthcare utilization, costs, and medical loss ratios. Given insufficient actions to increase productivity, these trends have reduced margins; average payer margins in 2024 were the lowest in a decade, with 37 percent of Medicare Advantage, 40 percent of small-group members, and 27 percent of large-group members in plans with negative margins. While health systems are on the way to recovery, their margins remain below prepandemic levels.

Even as the industry responds to the first storm, the next one is forming, and with potentially more severe consequences.

Forces pressuring the sector

We observe four forces confronting the healthcare sector (Exhibit 1). We estimated the impact of three of them on the industry: healthcare regulatory and legislative pressures, tariffs, and heightened clinical supply-and-demand shifts. We do not directly estimate the impact of the fourth force, medical and technology innovation, given how uncertain developments in this area are.²Medical advancements, including new drugs and care delivery methods, will continue to improve quality of life and health outcomes, but they can also raise questions about affordability and who ultimately pays for these advancements. Technology advancements, including automation, robotics, and AI, offer an opportunity to lower costs for the healthcare industry—just as they are doing for other industries. We discuss specific opportunities from technology advancements for payers and health systems later in this article.

The ultimate impact of the forces will depend largely on the implementation of specific government policies. But given the number of payers and health systems that are already in the red, any further negative developments could affect capital reserves and challenge the viability of subscale entities.

In aggregate, we estimate these forces could cause additional margin pressures of 1.0 to 5.5 percentage points for payers (Exhibit 2) and about 2.0 to 13.0 percent for health systems (Exhibit 3). This magnitude of margin impact is unlikely because it would make healthcare markets unviable. In practice, payers and health systems would take pricing actions to mitigate these headwinds. Actual financial impact on any specific company would depend on its specific business mix, local market conditions, customer affordability, and competitive responses of other players.

Healthcare regulatory and legislative actions

Mounting federal deficits are putting pressure on funding, leading to reductions in the federal workforce, changes in government programs, and reduced grants. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, will result in a series of changes to government-subsidized sources of health insurance coverage.

Changes to the Medicaid program in the OBBBA include imposing work requirements for able-bodied adults, more frequent eligibility determinations, and limits on using provider taxes as a state funding mechanism. There remains considerable uncertainty about how these changes will play out nationwide. But the Congressional Budget Office has projected that the law could lead to about ten million individuals losing Medicaid coverage over ten years while federal healthcare spending could be as much as $1.1 trillion lower in that period.³“Estimated budgetary effects of Public Law 119-21, to provide for reconciliation pursuant to Title II of H. Con. Res. 14, relative to CBO’s January 2025 baseline,” Congressional Budget Office, July 21, 2025.

Additionally, enhanced subsidies for the individual market under the Affordable Care Act are set to expire after December 2025. If enhanced subsidies do expire, we estimate that EBITDA pools for payers in the individual market would decline by half between now and 2027, with enrollment potentially dropping by about seven million. Declines in Medicaid and individual market enrollment would also increase financial pressures for health systems, given associated increases in uncompensated care.

At the regulatory level, the Centers for Medicare & Medicaid Services have proposed expanding site-neutral payments in original Medicare. This reform could ultimately align payments for outpatient services across sites of care (such as hospital outpatient settings, ambulatory surgical centers, and freestanding physician offices), leading to a decrease in hospital outpatient reimbursement and increased pressure on health system operating margins. For payers, site neutrality could be a tailwind by lowering costs for services traditionally billed at higher rates in hospital outpatient settings.

Changes to the 340B Drug Pricing Program are also possible. The administration recently finalized a 340B payment demonstration in which manufacturers could offer retrospective rebates instead of prospective discounts for 340B drugs.⁴“340B Rebate Model Pilot Program,” Health Resources & Services Administration, November 2025. Other actions are under consideration, including changes to Medicare Advantage and regulations for pharmacy benefit managers.

If all of the actions described above take place, health systems face margin pressure of up to 11 percentage points. Payers’ margins would experience a narrower impact, ranging from margin pressure of 1.5 percentage points to positive margin impact of 1.0 percentage point. The upside for payers would come from site neutrality.

Tariffs

There remains broad uncertainty regarding tariffs and the potential impact on the economy overall and the healthcare industry specifically.⁵“In a moment of tariffs, can the world find balance and trust to thrive?,” McKinsey, May 2, 2025. The United States has gone from trade-weighted tariff rates of about 2.2 percent at the start of 2025 to 16.9 percent as of August 8, 2025.⁶McKinsey analysis of industrial tariff data from the Office of the United States Trade Representative and Alexander Wolf, “Tariff update and what they mean for markets,” JPMorgan Chase, April 3, 2025.

Depending on what tariffs and tariff levels remain in effect (including the Section 232 tariffs⁷Section 232 tariffs can be imposed after a Commerce Department investigation finds imports “threaten to impair” national security. The Commerce Department announced a Section 232 investigation for pharmaceuticals and pharmaceutical ingredients in April 2025. On September 25, 2025, under Section 232 authority, President Trump announced that 100 percent tariffs would be imposed on pharmaceutical products, with exceptions being manufacturers that have broken ground on a US manufacturing plant, effective October 1, 2025. The administration later announced the pharmaceutical tariffs would be paused to give time to negotiate agreements with manufacturers and to finalize implementation. Currently, the United States has active Section 232 tariffs on steel, aluminum, copper, and some automotive parts. For more, see Section 232 of the Trade Expansion Act of 1962; “Section 232 investigations: The effect of imports on the national security,” US Bureau of Industry and Security, accessed October 27, 2025; Eric Sagonowsky, “Trump’s pharma tariffs on hold amid administration’s effort to secure pricing concessions, industry investment: Stat,” Fierce Pharma, October 1, 2025; and Shannon K. O’Neil, Julia Huesa, and Gabriela Paz-Soldan, “A guide to Trump’s Section 232 tariffs, in maps,” Council on Foreign Relations, updated October 8, 2025. for pharmaceutical products), we estimate health system spending on medical supplies and pharmaceuticals could increase by 0.2 to 8.4 percent, equal to up to 1.7 percent of total operational spending and corresponding margin pressure.

Payers are likely to be relatively insulated from cost increases caused by tariffs in the near term due to contracting cycles. In the longer term, however, they could bear much of the financial burden, along with employers and members as costs get passed through the system. In total, we estimate that payers could experience a cost increase and corresponding margin pressure of 0.3 to 2.2 percent if tariffs remain in effect.

Heightened clinical supply-and-demand shortages

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.

The demographic cohort of 70 years and older is expected to grow fastest of all age groups over the latter half of this decade. The demand for healthcare is expected to accelerate with this aging cohort. In this circumstance, medical utilization would continue increasing, leading to higher medical costs and cost pressure for healthcare organizations.

Recent industry estimates suggest that expenses for employer health coverage are expected to increase by more than 9 percent in 2026,⁸Anna Wilde Matthews, “Health insurance costs for businesses to rise by most in 15 years,” Wall Street Journal, September 10, 2025. although payers are taking cost-reduction measures in an effort to constrain per member increases. For health systems, these rising costs may translate into higher reimbursement rates, but there is also a risk that higher costs may decrease utilization, particularly for discretionary care. For payers, risks lie in failing to price in cost increases sufficiently, which would lead to a direct loss of margin. There are also risks for payers in pricing too high relative to competitors and losing market share.

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. Payers face greater margin pressure of 1.5 percent to 2 percentage points as the aging population and care intensity drive medical costs higher than premium growth and member cost-sharing can absorb.

Navigating the uncertainty

As the population ages and the burden of chronic disease increases, the healthcare industry will certainly become busier. However, given federal and state budgetary deficit challenges and the deterioration of government-sponsored health insurance funding, it is also possible that the system will become poorer. As a result, much of the added burden will fall on private sector employers that provide insurance for about 165 million lives across the United States,⁹Gary Claxton, Matthew Rae, and Aubrey Winger, “Employer-sponsored health insurance 101,” KFF, October 8, 2025. forcing them to pass on costs to employees. Healthcare could become unaffordable for many individuals, especially those with limited disposable income.

If healthcare costs continue to grow substantially faster than inflation, policymakers may demand more value from the private sector and limit degrees of freedom for industry participants through supply-side controls. Changes that have been discussed by policymakers in various forums include drug-pricing controls through measures such as mandatory most-favored-nation clauses on pharmaceutical manufacturers, limits on vertical integration in the pharmacy supply chain, and price transparency mandates within payer and health system contracts.

What healthcare organizations can do

In this challenging environment, healthcare organizations should pursue a multipronged change agenda to reimagine their business to deliver improved productivity and a more attractive value proposition for their services. Technology, and particularly AI, could be a bright spot, potentially radically improving operational workflows, expanding clinical capacity, and upgrading patient experience.

Navigating the uncertainty will require healthcare organizations to pursue one or more paths in parallel that emphasize transformation, business restructuring, and reimagining business models and innovation. Not-for-profit healthcare institutions should reflect on the trade-offs they can make and focus on the aspects of their mission that they can deliver most effectively.

Transformation. Strengthen go-to-market commercial excellence and market access capabilities, relentlessly focusing on growth and improving productivity by deploying automation and AI capabilities at scale. Organizations could reinvest savings in funding longer-term initiatives to reimagine the business and spur innovation (Exhibits 5 and 6):

• For payers, AI could reduce administrative costs by 13 to 25 percent and medical costs by 5 to 11 percent. Revenue could increase by 3 to 12 percent.
• For health systems, AI could increase margins by 11 to 19 percent of net patient service revenue, including opportunities from operations, clinical workforce management, revenue cycle management, supply chain, and corporate services.

We note that for some of these opportunities, there will be countervailing effects on payers and health systems. For example, improved utilization management that reduces medical costs would cause savings for payers but less revenue for health systems. Improved pricing and contracting for health systems would increase health system revenue but increase costs for payers.

Business restructuring. Question all activities, functions, and businesses of low value-add or weak competitive differentiation and consider outsourcing, divesting, and partnering with other organizations.

• Divest underperforming businesses with no path to deliver viable scale, strategic leverage, or return on capital (for example, a loss-making Medicaid business in a commercial-oriented payer, life and disability insurance in a health insurer, or long-term care in an acute-care health system).
• Spin off and seek external capital or partnerships for subscale businesses that could potentially grow but are stagnating under the parent organization (for example, a fragmented set of diversified businesses acquired by payers or the subscale commercial insurance arm of a health system).
• Rationalize care and medical management functions within integrated delivery network businesses or across risk-bearing health system and payer partnerships.
• Outsource noncore, subscale, and nondifferentiated administrative operations to higher-performing industry peers and vendors (for example, to gain scale in claims and back-office platform functions).
• Strengthen capabilities using captive centers in international markets (for example, revenue cycle management, application development and maintenance, and corporate shared services).

Reimagining business models and innovation. Explore new ways to commercialize assets.

• Create new offerings and value propositions using AI (for example, a “super app” that combines information from claims, medical records, wearables, and medical devices as a personal health agent; dynamic benefits and network configuration that enable personalized health plans for each member; direct-to-consumer personalized medicine based on genomics; and information and analytics products using enterprise data).
• Pursue strategic diversification through M&A into categories that provide a better fit with core capabilities and are more likely to benefit from favorable industry tailwinds and value pools in the future (for example, integration of gen AI clinical capabilities into physician clinical decision-making).

The level of industry uncertainty about how and to what extent the forces noted above will manifest, the impact on insurance coverage will shift, and the financial impact on the sector will be unprecedented. Participants must rethink how their organizations will create value in the future, make strategic choices, and act. Organizations that will thrive during this period of uncertainty will demonstrate agile decision-making and execution, adopt a technology-forward approach, and manage change across the workforce.