Most healthcare organizations have contingencies for economy, KLAS finds

Healthcare delivery organizations are saying they have yet to fully recover financially from the COVID-19 pandemic, and a high level of uncertainty around changing regulations and economic conditions is ratcheting up the financial pressures of narrow margins, staffing shortages and rising costs.

Because of that, 86% of healthcare organizations in a new KLAS survey say they have contingency plans, usually more than one, in place. Some are scaling back services and restructuring their workforce, while others are expanding high-reimbursement lines, which are strategies that could have an effect on patient access.

Most, 75%, are confident that there won’t be IT cuts. Instead, they’re shifting spend to vendor partnerships and tools with fast, measurable ROI, prioritizing resilience and steady growth over big bets, data showed.

Amid staffing cuts and shake-ups, nearly 40% of organizations are betting on AI and digital tools to ease administrative loads. Infrastructure, cloud and cybersecurity spend may be necessary to support AI investments, though most remain in pilot mode, lacking the funding, standards or resources to scale, KLAS found.

Even under-resourced organizations are scenario planning and modeling, trimming capital spend, or adjusting staffing – leaving them with limited teams, sparse analytics and no margin for error. These organizations have strategies but are strained in their ability to execute, said KLAS.

WHAT’S THE IMPACT

Seventy-one percent of respondents said that reimbursement changes – particularly cuts to Medicare/Medicaid – are going to have the largest negative impact by a large margin. 

One respondent, a vice president at a small health system, said there will be more people who are unable to pay for care.

“We have the federal cuts, and then we have the state, who has put in some state mandates about financial assistance,” the VP said. “The state says we can't pursue patients. So, the federal government says they are going to cut insurance, and then there is no way to force patients to pay, and there is no funding to cover the expenses. Our bad debt is going through the roof. There is no incentive for patients to have insurance. We can’t report them. They are taking high-deductible health plans or catastrophic plans, and they don’t have to; they can’t pay for their out-of-pocket expenses.”

While organizations with contingency plans typically have more than one, the data showed that those with none are largely small hospitals and physician practices. Additionally, academic health systems are the most likely to make workforce restructuring part of their contingency plans, which includes a wide array of approaches, from proactive layoffs to hiring and salary freezes. 

Rather than decrease their IT spend, healthcare organizations are more likely to make targeted investments, the report found. Health systems are three times more likely to decrease their spend than physician practices, with smaller and academic health systems more likely to say they’re reducing their spend.

THE LARGER TREND

The findings mirror those from a recent Deloitte survey, which found 84% of healthcare finance leaders are concerned about business conditions stemming from potential policy changes and disruptions linked to tariffs and supply chains. 

Almost three-quarters of respondents said they were concerned specifically about revenue growth and operating profitability. Other concerns included consumer affordability, increased healthcare costs and the potential impact on their organizations' financial performance. Some said the Medicare Advantage medical loss ratio in early 2025 was the highest it has been in several years, due to a significant uptick in members' use of healthcare services – a trend they said may continue through the rest of the year.

In May, the American Hospital Association expressed concern about drug and other shortages that may occur as a result of tariffs implemented by the Trump administration on items such as pharmaceuticals, medical devices and personal protective equipment.

Other low-margin, high-use medical goods such as syringes, needles and blood pressure cuffs come from international sources, the AHA said.

The volatility of tariff policies is making it difficult for hospital executives to pin down the effect they will have on the supply chain and budget.

It's not just the products themselves that are important, but the raw materials for pharmaceuticals, which mainly come from China, the AHA said. These active pharmaceutical ingredients, or APIs, are the most important components of any pharmaceutical manufacturer's supply chain, the group said. Additionally, about 30% come from China, so the tariffs may hamstring manufacturers in their efforts to produce drugs in the U.S.

China is also a major source of medical devices – many of them designed for single use, like blood pressure cuffs and stethoscope covers, and disrupting the availability of these instruments could hinder clinicians' ability to perform surgeries and keep patients safe from contagion, the AHA said.